The Cases of Brazil, India, Nigeria, and the Russian Federation

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World Bank Engagement at

the State Level

The Cases of Brazil, India, Nigeria, and the Russian Federation

2010The World Bank

Washington, D.C.

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©2010 The International Bank for Reconstruction and Development / the World Bank1818 H Street NWWashington DC 20433Telephone: 202-473-1000Internet: www.worldbank.orgE-mail: feedback@worldbank.org

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Contents

i i i

v Abbreviations

vii Acknowledgments

ix Foreword

xi Executive Summary

xvii Chairperson’s Comments: Informal Subcommittee of the Committee onDevelopment Effectiveness (CODE)

1 1 Introduction4 Scope and Objective of the Evaluation5 Structure

7 2 Which States? Evolution of the Bank Strategy11 Brazil13 India16 Nigeria18 Russia20 Conclusions

23 3 The Scope of Bank Engagement25 Fiscal Reform34 Multisector Engagement at the State Level

37 4 Modalities of State-Level Engagement39 Evolution of Instruments46 Partnership

47 5 Summary of Findings49 Future Research Agenda50 Findings

Appendixes53 A Portfolio Performance55 B Key Fiscal Indicators and Legal Framework at the State Level57 C The Global Financial Crisis and State-Level Lending59 D Countries at a Glance69 E Key State Social and Economic Indicators

75 F Distribution of Projects by States95 G Fiscal Responsibility Law—Brazil97 H Partnerships with Other Development Agencies101 I People Met

107 Endnotes

113 Bibliography

Boxes26 3.1 Increasing Use of Earmarked Transfers in India and the Russian Federation27 3.2 The Fiscal Adjustment Program in Brazil28 3.3 Analytic Work on Fiscal Federalism in the Russian Federation33 3.4 Improved Governance in the Fiscal Area in Orissa35 3.5 The Bank Program in Andhra Pradesh40 4.1 Multisector SWAp41 4.2 Minas Gerais—From Management Shock to Results-Oriented State45 4.3 Bank Engagement in Bihar: An Example of Effective Partnership50 5.1 Client Views

Figure11 2.1 Distribution of Projects by State

Tables4 1.1 Bank Lending to State/Provincial Governments (1998–2008)10 2.1 Comparative Data on Population and Gross Domestic Product per Capita in

States/Regions12 2.2 Evolution of Bank Engagement in Brazil, Fiscal 1998–200815 2.3 Evolution of Bank Engagement in India, Fiscal 1998–200917 2.4 Evolution of Bank Engagement in Nigeria, Fiscal 1998–200819 2.5 Evolution of Bank Engagement in the Russian Federation, Fiscal 1998–200844 4.1 Average Preparation and Supervision Costs of State- and Federal-Level

Projects, Fiscal 1998–2008

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

i v

v

Abbreviations

AAA Analytic and advisory activities ADB Asian Development BankAfDB African Development BankAusAID Australian Agency for International DevelopmentCAE Country Assistance EvaluationCAF Andean Development CorporationCAS Country Assistance Strategy CASPR Country Assistance Strategy Progress ReportCIDA Canadian International Development AgencyCMSIDP Ceará Multisector Social Inclusion Development Project CODE Committee on Development Effectiveness CPS Country Partnership StrategyDFID Department for International Development (U.K.)DPL Development policy lending/loanEBRD European Bank for Reconstruction and DevelopmentEC European CommissionESW Economic and sector workFFRFRP/L Fiscal Federalism and Regional Fiscal Reform Project/Loan FRL Fiscal Responsibility Law GDP Gross domestic product GSDP Gross state domestic productIBRD International Bank for Reconstruction and Development IDA International Development Association IDB Inter-American Development Bank IEG Independent Evaluation Group (World Bank Group)IFC International Finance Corporation ILO International Labor OrganizationIMF International Monetary FundJBIC Japan Bank for International CooperationMDGs Millennium Development GoalsMGDPL Minas Gerais Development Policy Loan NGO Nongovernmental organizationPAF Fiscal adjustment program PBL Policy-based lending PER Public Expenditure ReviewRFRF Regional Fiscal Reform FundRFTAP Regional Fiscal Technical Assistance ProjectSAL State-level adjustment loan SEEDS State Economic Empowerment and Development StrategySIDA Swedish International Development AgencySWAp Sectorwide approachUN United NationsUSAID U.S. Agency for International DevelopmentWHO World Health Organization

All dollar ($) amounts are in U.S. dollars.

View down central boulevard with high-rise construction in the background, Russian Federation. Photo by Yuri Kozyrev,courtesy of the World Bank Photo Library.

v i i

Acknowledgments

This report was prepared by the IndependentEvaluation Group Country Evaluation and RegionalRelations evaluation team: Konstantin Atanesyan(Task Team Leader, Senior Evaluation Officer),Basil Kavalsky (consultant), and Sarwat Jahan (con-sultant). It is based on the results of field visits toall four countries and interviews with key local(federal and state) counterparts and Bank teams.

The study draws extensively on four country back-ground papers prepared by Joao Oliveira (Brazil),

Tapas Sen (India), Olufemi Taiwo (Nigeria), andGalina Kurlyandskaya (the Russian Federation).

Ravi Kanbur (Cornell University), Steven Webb(Adviser, LCSPS), and Thomas O’Brien (Manager,SARDE) were the peer reviewers. Sarwat Jahan andTim De Vaan provided data and research assis-tance. Cecilia Tan and Corky de Asis provided administrative support and William Hurlbut pro-vided editorial support. Caroline McEuen editedthe report for publication.

Director, Independent Evaluation Group-World Bank: Cheryl GraySenior Manager, IEG, Country Evaluation and Regional Relations: Ali Khadr

Task Manager: Konstantin Atanesyan

Note: Vinod Thomas, Director-General, Evaluation, The World Bank Group, was recused from management oversight of the evaluation owing to his prior association with the Brazilian programas country director.

The Women in Movement Project sponsors an AIDS prevention clinic, Brazil. Photo by Alejandro Lipszyc,courtesy of the World Bank Photo Library.

i x

Foreword

This report summarizes the past 10 years(1998–2008) of World Bank engagement at thestate level in four selected large federal coun-tries: Brazil, India, Nigeria, and the Russian Fed-eration. This pilot cross-country study combineselements of a country assistance evaluation anda thematic review, looking at the evolution offour country strategies as well as the Bank’s state-level operations. The evaluation limited its re-view to selected cases of lending and analyticwork where the state governments were the prin-cipal partners of the Bank and the primary partyresponsible for development outcomes.

Evaluating state-level engagement posed severalstrategic and operational questions, among themthe selection of states, the scope, and the modal-ities of engagement. Two ideas—often at odds withone another—featured in most approaches toselection of states for direct engagement. One wasto support better-performing, reformist states(the lead or focus states approach), while theother was to support the poorest states as a moredirect route to reducing poverty.

The initial area of engagement was typically fis-cal reform, where the Bank generally helped toenhance the capacity of state governments forpublic financial management. In some states Bankinvolvement extended to multisector engage-ment that usually involved a mix of analytic work,development policy lending, and investment

lending, the aim being to derive synergies fromthe mix. The instruments deployed by the Bankevolved over the review period and includedstate-level development policy loans, multisectorresults-based investment lending, and reim-bursable technical assistance. There was consid-erable successful innovation in the developmentof the instruments used, yet little knowledgesharing among countries.

The report identifies lessons and good practice ex-amples that warrant further examination andwider dissemination. First, the study confirmsthe desirability of continued selective lending ina few focus states. The Bank’s engagement withprogressive, reformist states has added value andhas been highly appreciated, but to enhance thepoverty impact of state-level interventions, greaterweight should be given to the needs of the poor-est states by balancing states’ propensity to reformand the concentration of poverty within them. Ex-perience shows that it has been possible to achieveresults in some of the poorer, low-capacity statesthrough persistent work with committed statecounterparts and partnerships with other donors.Second, continued focus on public finance man-agement appears sound, irrespective of whetherengagement is confined to this area or serves asan entry point for broader engagement. Third,there is considerable scope for greater impactfrom knowledge transfer and expanded knowl-edge services.

Cheryl GrayDirector, IEG-World Bank

Gathering for a meeting, India. Photo by Curt Carnemark, courtesy of the World Bank Photo Library.

x i

Executive Summary

State-level engagement posed several strategicand operational questions, among them whichstates to engage, the scope of engagement, andthe modalities of engagement. The Bank set outits approach to selecting states in country strat-egy documents. Two tendencies—often at odds—featured in most approaches. One was to supportbetter-performing, reformist states (the lead orfocus states approach). The other was to supportthe poorest states as a more direct route to re-ducing poverty.

Concerning the scope of engagement, the initialand principal area of engagement was typically fis-cal reform—fiscal sustainability, medium-termfiscal frameworks, strengthening the public fi-nancial management capacity of state govern-ments, and fiscal federalism. In some states, Bankinvolvement extended beyond fiscal reform tomultisector engagement focused on the growthand poverty-reduction agenda. The modalities ofengagement and the instruments deployed bythe Bank evolved over the review period and in-cluded state-level development policy loans, multi -sector results-based investment lending, andreimbursable technical assistance. There was con-siderable successful innovation in this area, yet lit-tle knowledge sharing among countries.

The following findings are worth highlighting:

• First, the study confirms the desirability of con-tinued selective Bank lending in a few states.But the poverty impact of those interventionscould be enhanced by balancing the propen-sity of states to reform and the concentrationof poverty within them, giving greater weightto the needs of the poorest states.

• Second, continued focus on public financemanagement as the core area appears sound,irrespective of whether engagement is con-fined to this area or serves as an entry point forbroader engagement.

• Third, there is considerable scope to gaingreater impact from analytic work, knowledgetransfer, and expanded knowledge sharing—not so much in concepts and theories as in thepractical experience of what works and whatdoes not.

Evolution of Bank Strategy

Why State-Level Engagement?Over the past decade, the World Bank signifi-cantly expanded its engagement at the state levelin four large federations: Brazil, India, Nigeria,and Russia, mainly through lending, but also

Beginning in the late 1990s, the World Bank significantly expanded itsengagement at the state level in Brazil, India, Nigeria, and the RussianFederation. This pilot cross-country study reviews selected cases of World

Bank lending and analytic work at the state level in those four large, federatedcountries. In each case, state governments were the Bank’s principal devel-opment partners. The study looks at the evolution of the four country strate-gies and the Bank’s mode of engagement at the state level to glean lessonsfrom that experience for both the Bank and its federal and state partners.

through policy dialogue, technical advice, andanalytic work. Both demand and supply factorscontributed to this expansion.

On the demand side, federal governments fo-cused on fiscal stabilization following the financialcrises of the late 1990s. They saw the potential forthe Bank to provide state governments with in-centives for reform through financing, while encouraging discipline through agreed policymeasures and provision of technical support forimplementation. Federal governments had limitedscope to differentiate among states based on fac-tors such as commitment to reform. They saw inthe Bank’s capacity to do this a means of assist-ing states willing to take the lead, with the possi-bility of a demonstration effect for other states.

State governments were also eager to borrowfrom the Bank because its loans, denominated inforeign currency, generally came at lower ratesthan those provided by the federal governmentor the domestic market. Bank loans, while oftenfinancially modest at the federal level, could be amajor source of financing at the state level. Stategovernments welcomed the Bank’s focus on theireconomy as well as the associated dialogue, ad-vice, and analytic work. In addition, with the in-creasing concern about meeting or achievingoutcomes with regard to the Millennium Devel-opment Goals, both federal and state govern-ments saw the Bank as having a comparativeadvantage in supporting better service delivery inthe relevant social and economic sectors at thestate level.

On the supply side, with the combination of fis-cal stabilization and improvement in the fiscalsituation of the four countries during the com-modity boom of 2000–07, there was limited ap-petite to borrow from the Bank for federalprograms (this trend was more pronounced inBrazil and Russia; Nigeria, an International De-velopment Association [IDA] borrower, was an ex-ception; in India, federal-level borrowing increasedslightly in 2004–07). A level of Bank engagementcommensurate with the size and importance ofthese countries almost mandated the shift to the state level, where demand remained buoyant.

The increasing focus of the Bank on poverty re-duction after 1995 was also an important factor.There is a distance between federal-level pro-grams and results on the ground in such largecountries. The majority of the public expendi-ture categories most closely associated withpoverty reduction in the short and long terms are usually state responsibilities in these coun-tries. Therefore, increasing the Bank’s impact onpoverty reduction meant increasing the focus onactivities at the state level. In addition, many Bankcountry and sector staff found work at the statelevel in these countries more rewarding, given theclients’ greater interest in the Bank’s financialand knowledge resources.

Which States?The shift to the state level presented the Bank witha number of operational issues. Among them waswhich states the Bank should engage. The fourcountries have large numbers of states—26 statesand a Federal District in Brazil, 28 states and 7union territories in India, 36 states and a FederalCapital Territory in Nigeria, and 83 Regions (“sub-jects of the federation”—republics, oblasts, krays,and okrugs) in Russia. Working in all of themwould obviously be beyond the Bank’s budgetaryand human resource capacities.

The Bank defined the strategic approach to the se-lection of states in its Country Assistance Strategies(CASs). Some attempts were made to developquantified criteria for selective engagement, but the Bank generally preferred to keep the criteriabroad to allow for flexibility. It is clear from all thecountries reviewed that there was tension betweenthe Bank’s interest in identifying progressive, re-forming states that could serve as demonstrationsto others and its interest in supporting poverty re-duction by assisting the poorest states. In additionto these two key criteria—effectiveness of assis-tance and need (poverty)—another equally im-portant criterion was the political economy, uniquein each country and including (but not limitedto) relations between the federal center and thestates; capacity and political affiliation of the state-level leadership; level of trust and the relation-ship of the Bank teams with the clients; and localpolitics and electoral cycles.

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WORLD BANK ENGAGEMENT AT THE STATE LEVEL

In Brazil, the shift toward states was proposed ina mid-1990s CAS, directing lending to creditwor-thy reforming states. The next CAS, prepared atthe turn of the millennium, continued this ap-proach, using criteria established by the federalFiscal Responsibility Law (FRL) and stressing theintention of providing assistance to the states ofthe Northeast region with highest poverty levels.Lending to states became more multisectoral,and significant innovations were introduced, suchas state-level sectorwide lending (multisectorSWAp) and state-level development policy loans(DPLs). Both instruments were applied in statesthat had turned the corner fiscally, despite sig-nificant disparity in their income levels. The 2008Country Partnership Strategy (CPS) (World BankGroup 2008a) focused on a technical assistanceprogram of modest size with the federal govern-ment and a major demand-driven lending programwith states, conditioned on perceived commit-ment, ownership of reforms, and fiscal responsi-bility. The Bank engaged with some of the moreprosperous and reformist states. Although ini-tially the Bank attempted to expand investmentlending, this proved cumbersome, given the two-tier approvals required by the state and federalgovernments. As a result of joint consultations withstate and federal counterparts, by 2008 the com-position of state-level lending shifted towardcross-sectoral operations in support of economicpolicies and public sector reforms (DPLs and mul-tisector SWAps).

In India, the Bank shifted its focus to the statelevel in the mid-1990s. At the time, states were fac-ing financial problems, and both the federal andstate authorities were keen to tap into the Bank’sresources and take advantage of technical assis-tance. The Bank opted for major involvement inprogressive reforming states (the focus states ap-proach). The 2004 CAS (World Bank Group 2004a)signaled a change of strategy, noting that thefocus on reforming states was leading to neglectof the lagging states. Therefore, the CAS pro-posed the provision of technical assistance to thelagging states and an effort to shift lending tothem as well. This proved to be difficult. As the2009 CAS completion report noted, while lend-ing at the state level remained a large share of the

overall program, the share of lagging states inthe program actually declined.

In Nigeria, the Bank reactivated and intensifiedits lending activities after return to civilian rule in1999. During that period, Bank strategy passedthrough two phases: a period of interim strategies(fiscal 2000–05) following re-engagement; andthe fiscal 2005–09 CPS (AfDB, DFID, USAID, andWorld Bank Group 2009), when the Bank adopteda medium-term focus. Engagement at the statelevel in Nigeria was largely driven by the social andpoverty reduction agendas, with focus on im-proving infrastructure and providing support foragricultural and rural development. During theCPS period of fiscal 2005–09, the Bank’s strategyformally moved to focus on well-performing states(lead states), seeking to leverage state efforts andresources by granting them access to a perfor -mance package. Five states were selected basedon the government-led State Economic Empow-erment and Development Strategy (SEEDS)benchmarking process.

In Russia, the mid-1990s CAS emphasized re-gional investment projects (despite recognitionthat they were expensive to prepare and super-vise). The next CAS (World Bank Group 1999)outlined a phased shift in lending, away from in-vestment projects in infrastructure and energy in favor of increased emphasis on systemic as-pects of institutional development. A subsequentstrategy in the early 2000s continued the strat-egy shift, emphasizing support for reforms atthe regional level, particularly to strengthen pub-lic sector management. The 2005 CAS ProgressReport (World Bank Group 2005b) stated thatwork at the regional level was to be carried outin a multisectoral manner and would concen-trate on a small number of regions in agreementwith the federal government. The 2007 CPS(World Bank Group 2006) added a finishingtouch: the plan for a gradual shift to the newmodalities of cooperation and instruments, suchas the subnational facility that allows the BankGroup to provide funds without a sovereignguarantee to states and municipalities and pro-vision of technical assistance on a reimbursablebasis (fee for service).

EXECUTIVE SUMMARY

x i i i

The Scope of Engagement The second issue for the Bank was the scope ofits engagement. In Brazil, India, and Nigeria, theBank had carried out numerous state-specificprojects as part of its support for nationwide sec-toral programs. The decision about which statesto engage—for example, in support for agricultureand rural development in India or education inBrazil—was sometimes a matter of strategicchoice, but more often a matter of historical en-gagement or the availability of analytic work,based in turn on opportunistic involvement of theBank in particular states. In the new context, theBank was steering toward a new model of en-gagement. This tended to have two elements:support for fiscal reform and broader multisec-tor engagement at the state level.

Fiscal ReformThe Bank expanded its involvement in fiscal re-form in selected states. With the focus on stabi-lization and the need to reduce growing statedeficits or enhance state public expenditure man-agement capacity, the Bank engaged in two areas.

The first of these was fiscal federalism. Fiscal re-lations between the federal and state governmentsare politically highly sensitive, since this is oftenat the core of balancing regional interests. Froma strictly economic perspective, the resourcesavailable to the state governments need to be bal-anced with their expenditure responsibilities. Formany taxes it is more efficient to centralize col-lections. This disconnect generally creates an im-balance between the revenues collected by thestates and their development mandate. In Brazilthis imbalance is relatively modest, but in Nigeriait is very large. This means that the federal gov-ernment is required to transfer resources to thestate, generally based on various formulas thattake account of population, per capita income, andthe state government’s own tax effort. In the coun-tries reviewed, federal transfers have not beenvery effective in reducing disparities in expendi-ture capacity among states.

A second key issue in fiscal federalism concernsdiscretionary transfers from the center to thestates, usually intended to provide an incentive to

states to undertake high-priority programs. Thegovernment of India has used such schemes agreat deal. For the Bank, the political sensitivitiesmake fiscal federalism a difficult area for inter-vention unless there is an explicit request from thefederal government. The Bank has undertakensubstantial analytic work in this area. Russia, wherenew fiscal relations were being defined in thepast decade, is a very good example.

A second and far larger part of Bank engagementin fiscal reform is its direct support to public fi-nance management at the state level, includingenhancements in tax capacity, modernizing the taxstructure, developing a sustainable fiscal policy andmedium-term expenditure framework, and im-proving budget and expenditure management.The Bank’s engagement model generally startedwith a trigger mechanism that required states toshow commitment to fiscal reform.

This requirement was highly formalized in Brazil,where the federal government requires strict ad-herence to the FRL. In India and Nigeria the re-quirements were less formalized, but generallyrelated to timely budgeting and reporting. In Rus-sia, criteria were established for participation inthe fiscal reform projects supported by the Bank.Once the triggers were met, the Bank was able tofurther support fiscal reform through an en-gagement model that combined analytic workwith multisector lending and focused technical assistance in the areas of fiscal and governance reform.

Elements of this model are present in each coun-try. In Lagos, Nigeria, for example, intensive ana-lytic work at the state level was combined withinvestment lending and technical assistance, butthe Bank is only now considering the possibilityof using multisector lending in support of its ap-proach. In Andhra Pradesh and Orissa in India, theBank carried out analytic work and subsequentlyused multisector loans to support fiscal reform,but technical advice, except that embedded in theanalytic work and lending activities, has not beena focus of the approach. The Bank’s involvementwith tax policy has been relatively light; the focusof its efforts has been on budgeting and public

x i v

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

expenditure management systems, and increas-ingly on governance issues associated with trans-parency and accountability for efficient servicedelivery.

Multisector EngagementIn addition to fiscal engagement, the Bank has alsoundertaken a broader state-level multisector engagement, which has focused on the growthand poverty reduction agenda. This has involveda mix of analytic work, adjustment lending, andinvestment lending. The Bank produced an ex-plicit strategy for its activities in a particular statein only a few cases. Such strategies were usuallycovered in broad-brush fashion in the CAS.

At their most developed, as in Andhra Pradesh inIndia and in Ceará in Brazil, the Bank programscombined investment lending in most of the coreeconomic and social sectors with multisectorlending. The objective was to derive synergiesfrom the combination of activities. In AndhraPradesh, for example, the Bank was explicit in itsview that the difficult measures required for fis-cal reform needed to be matched by increased in-vestment in agriculture, rural development, health,and education to provide a politically acceptablepackage of reforms.

The selection of states for this broader engage-ment focused more on fiscal reform than on thebroader poverty issue. The Bank spent a great dealof time in these countries supporting relativelyhigh-income, high-capacity states (such as MinasGerais in Brazil, St. Petersburg in Russia, and Kar-nataka in India). While this support added value,it came at the expense of Bank efforts in poorerstates that lack capacity.

Modalities of Engagement How to engage was also a concern for the Bankduring the period, and there was considerable evolution in the approach. The first bridge to becrossed was the use of adjustment (developmentpolicy) lending at the state level (the first such ad-justment loan was made in March 2000 to thestate of Uttar Pradesh in India). Until that pointthe Bank had struggled to find an instrument to attach to its policy dialogue and strategic ap-

proach at the state level. The multisector re-structuring loan in Andhra Pradesh, an invest-ment loan undertaken in 1998, was a way toaccomplish this, but it was an enormously costlyoperation to prepare and supervise.

Adjustment lending rapidly became the instru-ment of choice to support fiscal reform andstatewide strategies in Brazil and India, but inBrazil there was a sense that it was less effectivein reaching out to the line ministries in key sec-tors. The Bank’s Brazil country team developedthe innovative approach of a multisector SWAp,a results-based instrument with target indicatorsdefined for each sector and disbursements asso-ciated with achievement of the targets. This hadvery positive outcomes: it brought to the forethe linkages required to achieve results, such asthe need for improved water supply in order toreduce infant mortality. Another important inno-vation was the pioneering of reimbursable tech-nical assistance at the state level in Russia. Bankbudgets rarely allow the level of analytic workdemanded by intensive engagement in three-to-five states, and an approach that permits states topay for additional work has considerable prom-ise for other middle-income countries.

FindingsOverall, the analysis leaves little doubt that theBank’s engagement at the state level did addvalue. There was a great deal of enthusiasm at boththe federal and state levels in these countries re-garding the Bank’s contribution and a large num-ber of specific achievements. Although state-levelengagement often requires additional effort andcan be resource-intensive, it is usually worth thecost.

The main findings of this review, which may behelpful in guiding the organization of future workat the state level, include:

On selection of states:

• The strategy to be selective and concentratelending services on a few states to enhancethe impact of the Bank’s program is right inprinciple, but selection criteria and the mode

EXECUTIVE SUMMARY

x v

of implementation could give greater weight tothe needs of the poorest states.

• Bank engagement with high-performing statesclearly added value, both strengthening in-state capacity and encouraging state-to-stateknowledge transfer, albeit mainly between highperformers. However, there is little evidencethat it had the desired demonstration effect on poor, lagging states on the scale the Bankhoped for, or that the Bank had an exit strat-egy to permit increased focus on poorer states over time. At the same time, experienceshows that it is possible to achieve results in thepoorest states through persistent work withcommitted state counterparts and strong part-nership with the federal government and otherdonors.

• It is important to stay engaged not only instates that are able to borrow from the Bank,but also in states that have no fiscal space to bor-row but demonstrate a genuine commitmentto development that can be supported throughanalytic work and technical assistance.

On the scope of engagement:

• Continued focus on public finance manage-ment as the core area for state-level work ap-

pears sound, whether engagement is confinedto this area or it serves as an entry point forbroader engagement.

• The lending programs and Bank budgets insome states are often larger than for manyBank clients. For states where the Bank plansor has a major engagement, a brief state strat-egy document could be a useful tool for defin-ing the scope of engagement and developinga medium-term outlook.

On modalities of engagement:

• There is considerable scope for greater impactfrom knowledge transfer and expanded knowl-edge services. In particular, there is strong de-mand for better knowledge sharing, both withinthe Bank and across the countries concerned.This is not so much a matter of sharing of con-cepts and theories as it is of communicatingpractical experience regarding what is workingand what is not.

• Widening the scope and increasing the amountof analytical work at the state level could be help-ful in identifying high-impact, high-priorityareas. There seems to be a potential for closerpartnership between state governments andthe Bank in this area.

x v i

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

x v i i

Chairperson’s Comments:Informal Subcommittee

of the Committee on Development

Effectiveness (CODE)

Summary Members commended IEG for the well-writtenand informative report and welcomed manage-ment’s broad agreement with its findings. TheSubcommittee held a rich discussion, wheremembers noted the importance of this report as a basis for further considering the direction and potential of state-level engagement by theBank. Some members remarked on the con -siderable innovation and creativity in this area,which was considered a critical aspect of a coun-try’s development. Going forward, the need tobear in mind the poverty focus in engaging at the state level and to strengthen knowledge sharing within and across countries was noted.Members’ interventions focused on IEG’s find-ings related to the need for the Bank to have astrategic approach to state-level support, selec-tion of states, modalities of engagement, andknowledge transfer, which are elaborated below.

The comparative analyses of the experiences inthe four countries covered by the report andstaff elaboration of country experiences were appreciated.

Recommendations and Next Steps The Subcommittee recommended the followingto management:

• Consider this IEG report as a basis for furtherthinking toward a more comprehensive frame-work to guide the Bank’s engagement at thestate level, and to continue adjusting its in-struments to meet the needs of the states.

• Maintain a flexible approach to selection ofstates, to accommodate different country con-texts while keeping in mind the poverty focus.

• Consider ways to strengthen systematic knowl-edge sharing and learning from ongoing workat the state level.

On September 21, 2009, the Informal Subcommittee of the Commit-tee on Development Effectiveness (CODE) considered an Inde-pendent Evaluation Group (IEG) report entitled World Bank

Engagement at the State Level: The Cases of Brazil, India, Nigeria, and theRussian Federation. Staff representatives from the four countries consideredin the report were present at the meeting.

Main Issues Discussed Framework for Bank Engagement. Somemembers noted the potential benefit of IEG’ssuggestion to prepare brief state-level strategydocuments for states with significant long-termBank engagement. Management clarified thatthe strategic analysis and dialogue with clientcountries on the Bank’s engagement at the statelevel takes place as part of the CAS process. It alsoexpressed concerns about adding another layerof strategy paper, but noted that integrating sep-arate strategies for the most important stateclients within a CAS could be a useful way to ap-proach this issue.

Selection of States. Members supported selec-tivity in engaging at the state level and discussedthe approach to selecting states, i.e., whether theBank should work with more progressive, re-formist states or with poorer states in light ofIEG’s findings, taking into consideration theBank’s mandate to reduce poverty and the po-tential added value of focusing on lagging states.There was general consensus to preserve flexibilityto accommodate different country contexts andpolitical economies and to enable the Bank towork with active state actors at the state and sub-state levels, while keeping in mind the povertyfocus.

The importance of transparency in selecting stateswas emphasized. IEG noted the tension betweenthe two approaches and reiterated that to en-hance the poverty impact of state-level inter-vention, greater weight to the needs of the pooreststates was merited since there was no clear evi-dence of the desired demonstration effect. IEGadded that it is possible to achieve results throughpersistent work, even in the poorest and low-capacity states. Management commented on thecountry realities that have driven the selectionof states, as in the case of India, where the Bankis making an effort to work more with laggingstates. Reference was also made to the CPS inNigeria that describes the principles of engage-ment at the state level; a key principle is the levelof human development indicators.

Federal Government and States. Some ques-tions were raised about ownership and involve-ment of the federal government with regard toBank assistance to states and any tensions en-countered between the federal and state levels.In addition, interest was expressed in the Bank’scomparative advantage in working directly withstates, the costs and benefits of working directlywith states, and approaches to addressing for-eign exchange risks at state levels. IEG and man-agement stressed that Bank engagement at thestate level is predicated on federal governmentsupport. Referring to the example of Brazil, man-agement also noted that the federal governmenthas encouraged Bank involvement at the statelevel as a way to incentivize states to carry outdifficult reforms (such as reducing the fiscaldeficit). It also indicated that the Treasury De-partment has offered assistance to Indian statesinterested in addressing exchange rate risks.

Scope and Modality of Support. Some mem-bers highlighted the potential for Bank supportfor fiscal federalism and governance and capacitybuilding at the state level. A member sought moreclarity on the outcomes of fiscal reforms and an-other encouraged conducting Public Expendi-ture Reviews at the state level. Others emphasizedthe importance of analytical work at the statelevel, including in lagging states. A few memberssuggested that the IFC model of state-level sup-port be reviewed. Management described someof the ongoing analytical work at the state levelsuch as the Doing Business reports in Russia andNigeria, Public Expenditure Reviews in Nigeria,and Social Expenditure Reviews in Russia.

Demonstration Effect and Knowledge Shar-ing. A few members sought more clarity regard-ing the limited demonstration effect on laggingstates, noting that the experience in Russia seemsto have been more positive. Speakers stressedthe importance of strengthening knowledge shar-ing across states and countries. For example, thepotential for other countries to learn from Russia’sexperience with fee-based services was noted. Afew members urged that the Bank should give

x v i i i

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

the highest priority to demand for services wherethe recipient was willing to pay a fee, because thisindicated the seriousness and the will to carryout reform and change. The possibility of a GlobalExpert Team to improve knowledge sharing amongstaff was suggested. Management elaborated onthe demonstration effect in Nigeria and Russia.The Nigeria country team representative de-scribed their efforts in reaching out to other

regional departments to learn from their expe-rience and about sharing of experience acrossstates through the Governor’s Forum in Nigeria.It was also noted that there have been institutionalefforts to share experiences on provision of fee-based services. It was noted that Brazil is now con-sidering fee-based services at the state level.

Giovanni Majnoni, Chairman

INFORMAL SUBCOMMITTEE OF THE COMMITTEE ON DEVELOPMENT EFFECTIVENESS (CODE)

x i x

Chapter 1

Evaluation Highlights

• The Bank began to think of the stateas a strategic unit in the mid-1990s.

• State effectiveness in planning, budgeting, and implementing pro-grams contributes to developmenteffectiveness.

• The four country programs exam-ined—in Brazil, India, Nigeria, andRussia—had a similar aim of engag-ing at the state level.

• In each case, state governmentswere the Bank’s principal develop-ment partners.

Town gathering, Nigeria. Photo by Curt Carnemark, courtesy of the World Bank Photo Library.

3

Introduction

National projects with a single implementing min-istry or agency are less costly to prepare and su-pervise than multiple subnational projects. Thisdid not prevent the Bank from preparing and im-plementing projects at the subnational level, but,in general, subnational units were seen as ad-ministrative agents, with responsibility for their de-velopment residing with the federal government.In large countries where the bulk of economic andsocial expenditures that affect the living stan-dards of the poor are under the control of stategovernments2 or other decentralized units, Bankefficiency in fulfilling its poverty reduction man-date was impeded.

For much of its history, the Bank has provided in-vestment loans for projects located within theterritory of particular states in federations. Stategovernments have often been signatories to proj-ect agreements in the irrigation, roads, water sup-ply, agriculture, and education sectors and haveshared responsibility for the implementation ofthese projects. However, until the mid-1990s, theBank did not think about the state as a strategicunit. Nor did the Bank consider its package of statelending a vehicle for reform and poverty reduc-tion or as elements in a coherent state-level de-velopment program.

In the late 1990s, with a renewed focus on povertyand the adoption of the Millennium Develop-ment Goals (MDGs), the Bank turned increas-

ingly to engagement with states as thelogical evolution of its programs in sup-port of poverty alleviation in large fed-eral countries. Despite some initialhesitation, federal governments soonwarmed to the approach. They saw a number ofpotential benefits from the Bank’s involvement,including the Bank’s capacity to differentiate be-tween states, to reward reforming states by trans-ferring additional resources, or equalize fundingto help states with weaker social service coverageor quality to improve them—something that canbe politically difficult for some federal govern-ments. In addition, the Bank can both create in-centives for increased state-level expenditurethrough lending in specific areas and provideknowledge services to add to effectiveness in ad-dressing the MDGs.

In some of the larger federal countrieswhere the Bank is active, state gov-ernments have emerged as importantdevelopment actors, with major re-sponsibility for infrastructure and socialservice provision. Table 1.1 shows the size of Banklending at the state (or provincial) level in someof its biggest borrowing countries. The effective-ness of state governments in planning, budgeting,and implementing programs has thereforeemerged as an important determinant of con-straint in overall development effectiveness. Con-sequently, the Bank’s programs in countries such

The World Bank has traditionally focused its lending, analytic work, andpolicy dialogue on federal governments.1 This is a requirement of theBank’s Articles of Agreement, which specify that the Bank lend either

to a federal government or with a sovereign guarantee. It has also been a prac-tical matter.

The Bank’s engagementwith states in federationsbegan to change in themid-1990s.

State governments havegradually emerged asimportant players indevelopment.

as Brazil, India, Nigeria, and Russia have increas-ingly been geared toward providing support forthe state governments.

The Bank has engaged with state governments intwo broad areas. First, it sought to improve fiscal

outcomes and governance at the statelevel. Second, it tried to increase thefocus on poverty reduction by steeringresources and advisory services tostates where poverty is greatest andthose most critical for achievement ofthe MDGs.

The increase in the Bank’s state-level engage-ment has not been a coordinated effort. State-levelactivities have been, and continue to be, drivenby individual country programs. During the pe-riod of state-level engagement the Bank did notexamine its approach from a cross-country per-spective. Each country team has had to find itsown way and develop programs from first prin-ciples, often “reinventing the wheel.” By now,however, there is a significant body of experi-ence in dealing with state governments and someemerging good practice that warrants further examination and wider dissemination. This wasthe motivation for this Independent EvaluationGroup (IEG) cross-country review.

Scope and Objective of the EvaluationAlthough the Bank has had substantial programsof state and province-level lending in many coun-

tries (see table 1.1), given time and resource lim-itations, this evaluation focused on selected casesin four countries that are major clients of theBank: Brazil, India, Nigeria, and Russia.3 These fourcountries were selected taking into account ge-ographic representation, regional importance,size of state-level programs, and use of innovativeinstruments and approaches by the country teams.The study covers the period from 1998 to 2008 andcombines elements of a Country Assistance Eval-uation (CAE), looking at four country programswith a similar aim of engaging at the state level ina large federal system, and a thematic reviewbased on a limited number of case studies. Thestudy looked at a number of projects in two statesin each country. Therefore, it neither claims uni-versal knowledge of all specifics and outcomes ofBank lending and nonlending activities in all largefederal countries, nor does it suggest universalrecipes for other large federal countries not in-cluded in this review. Instead, it looked at theevolution of four country strategies and the Bank’smode of engagement in order to draw lessonsfrom that experience.

The evaluation limited its review to state-levellending and analytic work where the state gov-ernments were the Bank’s principal partners, andtherefore a primary party responsible for devel-opment outcomes. These include loans support-ing improved fiscal management and governancein particular states and loans that were strategicat the state level—that is, loans designed to sup-

4

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

The Bank has engagedthem on fiscal outcomes

and governance andsought to increase its

focus on povertyreduction.

Table 1.1: Bank Lending to State/Provincial Governments (1998–2008)

Number of loans Amount (US$ billions)

Percentage of Percentage ofCountries/operations State Total state lending State Total state lending

India 72 107 67 12.7 22.9 57

Brazil 47 101 47 5.2 15.9 33

China 71 112 63 11.5 15.7 73

Argentina 18 57 32 3.6 11.6 31

Mexico 5 49 10 0.85 11.5 7

Pakistan 26 40 65 2.0 7.4 27

Nigeria 19 32 59 1.8 3.1 58Sources: World Bank data, ImageBank.

port a state-level economic development pro-gram or a state-specific sectoral or thematic issue(including state-level development policy lend-ing and multisector sectorwide approaches). Sev-eral federal-level loans that supported improvedsystems of fiscal federalism were also included.

StructureChapter 2 summarizes the evolution of thinkingin adapting the Bank’s policies to encompass lend-ing and other work at the state level. It also cov-ers how the Bank dealt with selecting states withwhich to engage in different country contexts.

Chapter 3 reviews the scope of theBank’s engagement at the state level, in-cluding support for fiscal reform and ad-dressing poverty reduction and thegrowth agenda through multisector en-gagement and policy dialogue. Chapter4 covers the modes of Bank engagement at thestate level, including selection of lending instru-ments, analytic and advisory activities (AAA) andcapacity building, and the process im-plications of working at the state level.Chapter 5 summarizes the findings fromthe four country case studies.

INTRODUCTION

5

This evaluation looks atthe evolution of stateengagement in fourcountry strategies from1998 to 2008.

In these cases, the stateswere the Bank’s principaldevelopment partners.

Chapter 2

• After the financial crises of the late1990s, states gained the fiscal spaceto allow them to seek financing fortheir investment programs.

• Engagement in each country wasconditioned by demand, capacity,and ownership of reforms.

• In most cases the decision to en-gage at the state level was reason-able and based on demand and statecapacity.

• The most difficult issue has proven to be selectivity—which states tochoose—with tension between en-gaging those with capacity and will-ingness and those that are thepoorest.

Women harvesting cotton, India. Photo by Ray Witlin, courtesy of the World Bank Photo Library.

9

Which States? Evolutionof the Bank Strategy

On the demand side, federal governments fo-cused on fiscal stabilization following the financialcrises of the late 1990s. They saw the potential forthe Bank to provide state governments with in-centives for reform through financing, while en-forcing discipline through conditionality andproviding technical support for implementation.Federal governments have limited scope for dif-ferentiating between states on the basis of non-tangible factors such as commitment to reformand saw the Bank’s capacity to do this as a meansof assisting states willing to take the lead, with thepossibility of a demonstration effect for otherstates.

As a rule, state governments were also eager toborrow from the Bank. Bank loans, denominatedin foreign currency, typically came at lower ratesthan those provided by the federal governmentor the domestic market.1 Bank loans, while oftenfinancially insignificant at the federal level, couldbe a major source of financing at the state level.Finally, state governments welcomed the Bank’sfocus on their economy and the associated dia-logue, advice, and analytic work. In addition to in-creasing concern about meeting MDGs, or at leastachieving respectable outcomes, both federal andstate governments saw the Bank as having a com-parative advantage in supporting better service de-livery in the relevant social and economic sectorsat the state level.

On the supply side, with the com-bination of fiscal stabilization andimprovement in the fiscal situationof the four countries during thecommodity boom of 2000–07, therewas a limited appetite to borrowfrom the Bank for federal programs(this trend was more pronounced inBrazil and Russia; Nigeria, an International De-velopment Association [IDA] borrower, was an ex-ception; in India, federal-level borrowing increasedslightly in 2004–07). A level of Bank engagementcommensurate with the size and importance ofthese countries almost mandated the shift to thestate level, where demand remained buoyant.The Bank’s increasing focus on poverty reductionafter 1995 was also an important factor. There isa great distance between federal-level programsand results on the ground in such large countries.Most of the public expenditure cat-egories most closely associated withpoverty reduction in the short andlong term are usually state respon-sibilities in these countries. Hence,increasing the Bank’s impact on poverty reduc-tion meant increasing the focus on and the ac-tivities at the state level. A final point is that Bankcountry and sector staff found work at the statelevel in these countries more rewarding giventhe generally greater interest of the client in theBank’s financial and knowledge resources.

The 1998–2008 period saw a major expansion of Bank engagement atthe state level in four large federations: Brazil, India, Nigeria, and Rus-sia, mainly through lending but also through policy dialogue, techni-

cal advice, and analytic work. Both demand and supply factors seem to havefed this expansion.

In the late 1990s, federal governments sawpotential for the Bank tosupport state-levelreforms, and statesthemselves were eager toborrow from the Bank.

The Bank saw in thestates an opportunity to increase its impact onpoverty.

Average GDP Average GDPAverage per capita of per capita of

Population Number of population GDP the three the three(millions, states/ per state per capita richest states poorest states

Country 2007) regions (millions) (PPP, 2007) (2005/06) (2005/06)

Brazila 191.6 26 states 6.1 $9,034 $10,464 $1,8291 Federal District

Indiab 1,123.3 28 states 30.2 $2,598 $1,376 $2297 union territories

Nigeriac 147.9 36 states 3.8 $1,867 $4,021 $1311 Federal CapitalTerritory

Russian Federationd 141.6 83 regions 1.6 $14,743 $27,107 $1,078Sources: Population and GDP per capita (purchasing power parity [PPP], 2007) data are from World Bank data. GDP per capita of states/regions are from: Brazil,Instituto Brazileiro de Estatistica (IBGE), Regional Accounts 2005; India, Central Statistical Organization of the government of India and the State Statistical Bureaus; Nigeria, Economic Associates (economic consulting firm; the Nigeria National Bureau of Statistics does not yet publish state GDP data); and Russia,Federal State Statistics Service. Data for 2005/06 are used because that is the most recent year available for all four countries.Note: GDP = gross domestic product; PPP = purchasing power parity.a. Three richest states in Brazil are São Paulo, Rio de Janeiro, and Federal District. São Paulo’s GDP would rank 22nd largest in the world. The poorest (by percapita GDP) are Alagoas, Maranhão, and Piauí. b. Three richest states (union territories) in India are Goa, Chandigarh, and Ponicherry. The poorest are Bihar, Uttar Pradesh, and Orissa. c. Three richest states in Nigeria are Bayelsa, Cross Rivers, and Delta. The poorest are Adamawa, Taraba, and Jigawa.d. The three richest regions in Russia are Khanty-Mansi Okrug, Yamal-Nenets Okrug, and Sakhalin Oblast—all remote and sparsely populated oil- and gas-producing regions. The poorest are Ingush Republic, the Republic of Chechnya, and the Republic of Kalmykia.

The shift to the state level presentedthe Bank with a number of operationalissues. First among these was whichstates the Bank should engage. Most

of these countries have large numbers of states—26 states and a Federal District in Brazil, 28 statesand 7 union territories in India, 36 states and aFederal Capital Territory in Nigeria, and 83 sub-jects of the federation (republics, oblasts, krays,and okrugs) in Russia (table 2.1). The Bank’sbudgetary and human resource capacity gener-ally allowed engagement in perhaps three-to-fivestates at any given time. Selection was thus strate-gic and was usually defined in the Bank’s coun-try strategy documents. Some of these documentsattempted to develop quantified criteria for se-lective engagement, but generally the Bank pre-ferred to keep the criteria broad to allow forflexibility. It is clear from all the countries re-viewed that there was tension between the Bank’sinterest in finding progressive, reforming statesthat could serve as demonstrations to others andits interest in supporting poverty reduction by as-

sisting the poorest states. The motivation and tim-ing of the Bank’s engagement at the state leveldiffered by country.

In terms of distribution of state-level lendingwithin particular countries, the Bank generallytended to concentrate its engagement on a selectnumber of states, instead of spreading its effortsthinly across the entire country. In Brazil (figure2.1),2 approximately 51 percent of the state-levellending (in number of projects) was allocated tofive states. In India (figure 2.1), approximately62 percent of the state-level lending (in numberof projects) was allocated to five states. In Nige-ria, four states—Bauchi, Cross River, Kaduna, andLagos—implemented projects that were specifi-cally tailored for individual states. The other statesin Nigeria were evenly distributed in implement-ing state programs designed to roll out to allstates. In Russia, the scale of state- and regional-level engagement was much smaller (only a fewloans), but it nonetheless provided importantlessons about competitive selection of states

1 0

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

Table 2.1: Comparative Data on Population and Gross Domestic Product (GDP) per Capita in States/Regions

The problem for the Bankwas the matter of which

states to engage.

based on fiscal performance and the use of newengagement modalities.

BrazilThe Constitution of 1988 created a Brazilian fed-eration, which today consists of 26 states, one Fed-eral District, and 5,564 municipalities.3 After thedecentralization drive fostered by the constitution,Brazilian states were given responsibilities for theprovision of key social services. At the time, itwas believed that devolution of responsibility tothe states would lead to more efficiency. Insteadit led to unsustainable spending4 and the accu-mulation of large state-level debts.5 This began tochange with the adoption of the Real Plan in 1994,which set the stage for economic stabilization6 andincreased transparency in the finances of theBrazilian states.

With stabilization, federal borrowing declined,and the Bank faced a new situation in Brazil. Tostay active with a sizeable program, and to be rel-evant, it formally re-oriented its lending strategyin the mid-1990s Country Assistance Strategy(CAS), proposing to shift the focus of lending, pol-icy dialogue, and advisory work toward the states.Because state indebtedness had reached crisisproportions, the Bank suggested that lending bedirected to creditworthy states undertaking re-

forms in public finance and social expenditure/anti-poverty policies.7 The1997 CAS advocated continuing thesame state-centered assistance strat-egy (table 2.2).

The CASs of the mid-1990s pointedout the risks to stabilization posed bythe growing fiscal imbalances at the state level andsignaled the Bank’s willingness to support mean-ingful reforms through adjustment lending. Thefederal government was not yet ready to start amajor reform at the state level, but requestedBank assistance in its efforts to reform the fi-nances of Brazilian states. In response to these re-quests, the Bank initiated policy dialogue withseveral states, culminating in the preparation offour state reform loans (de facto development pol-icy loans [DPLs]).8 These loans accounted for 10percent of new commitments to Braziland supported the privatization ofbanks and several infrastructure en-terprises owned by the states.

The millennium strategy continued direct lendingto states within fiscal eligibility criteria establishedby the federal government’s Fiscal ResponsibilityLaw (FRL), adopted in May 2000.9 This was a timeof transition for many states, because they had to

WHICH STATES? EVOLUTION OF THE BANK STRATEGY

1 1

Figure 2.1: Distribution of Projects by State

Pernambuco8%

A. Brazil B. India

Bahia13%

Otherstates49%

Otherstates38%

Tamil Nadu8%

Rajasthan8%

Karnataka14%

AndhraPradesh

15%Uttar Pradesh17%

São Paulo8%

Ceará12%

MinasGerais10%

Source: World Bank data.

The initial Bank strategyin Brazil was driven bythe desire to engage withlikely reformers, but itwas limited by high state-level debt.

In the late 1990s, theBank began to engagewith reforming states.

prove their creditworthiness by producing a pri-mary surplus in the preceding year and a debt/revenue ratio of 1 or less, or be in line with theagreed time path for debt reduction toward adebt/revenue ratio of 1. During this period ofstate-level fiscal adjustment, direct lending tostates by the Bank was expected to decline tem-porarily. The Bank intended to focus its lendingand nonlending services on the states of theNortheast region, including states with the high-est poverty levels.10 Meanwhile, the Bank alsoplanned to step up its nonlending services to abroader group of states.

During the early 2000s, Brazil’s economy was ona downward spiral prompted by the currency cri-sis of 1998. The drain on foreign reserves had

been dramatic,11 and the federal governmentneeded to increase these reserves quickly to pro-tect itself from external shocks. The Bank re-sponded by approving several large programmaticDPLs to the federal government.12 Because of thedual effect of the federal need for Bank funds andthe limitation placed on states’ borrowing throughthe FRL, the Bank’s actual lending to states fromfiscal 2001 to 2003 was small, about 19 percent ofthe total lending volume, down from 33 percentduring the previous CAS period (fiscal 1998–2000).

The 2003 CAS reinforced the commitment tofocus on the Northeast and started building anew focus on states with higher levels of povertythrough a concerted effort to strengthen institu-tional capacity. Since virtually all states showed de-

1 2

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

Table 2.2: Evolution of Bank Engagement in Brazil, Fiscal 1998–2008

2008 CountryMid-1990s strategies Millennium strategy 2003 CAS Partnership Strategy

Bank strategy

Major instruments/ milestones

Portfolio(in dollars)

Focus on creditworthyreforming states to supportstabilization

Alleviate poverty inNortheast states

Policy-based investmentloans are given to fourstates

States: 33 percent

Federal: 65 percent

Explicit focus on theNortheast (NE) region(states with the highestpoverty levels)

Bank’s lendingcommitments to statesdecline because of theneed to comply with theFRL

Eligible NE states receiveloans for povertyalleviation or improvingsocial services

States: 19 percent

Federal: 81 percent

Reinforcement of thecommitment to theNortheast region.

Special focus on statesthat were “turning thecorner” fiscally

First subnational SWAp isdeveloped (Ceará)

First subnational DPL isgiven (Minas Gerais)

States:18 percent

Federal: 82 percent

Continue special focus oncreditworthy states, withstate governors definingthe priorities

Emergence of a state-dominated lending portfolio

Expand the SWApinstrument to severalstates

Greater coordination ofBank lending cycle andBrazil’s political cycles atthe state level

States:a

70 percent

Federal: 30 percent

Source: World Bank country strategy documents.Note: DPL = development policy loan; FRL = Fiscal Responsibility Law; SWAp = sectorwide approach.a. The portfolio for fiscal 2008–11 shows the planned allocation between state and federal governments.

mand for Bank support, an additional filter forstate selectivity was needed.

To accomplish this, the 2003 CAS set out a frame-work for lending to states, with selection criteriacovering sectoral integration (in particular, em-phasizing “horizontal” support to public sectormanagement13), and with special focus (agreedwith the federal treasury) on states that were“turning the corner” fiscally.14 In some cases,poverty criteria gave way to other considerations,such as the demonstration effect.15

Lending to states under the 2003 CAS (fiscal2004–07) became more multisectoral. Significantinnovations in lending instruments16 were in -troduced, including state-level DPLs and a state-level sectorwide lending approach (multisectorSWAp).17 Both instruments were applied in statesthat had “turned the corner” fiscally, despite sig-nificant disparity in their income levels,18 andsupported state teams that had defined innova-tive, well-tailored reform programs.

Despite introduction of new instruments, over-all lending to states in fiscal 2004–07 remainedmodest—comprising only about 18 percent ofnew commitments.19 Bank lending was domi-nated by large, federal-level DPLs targeted at mit-igating vulnerability to external shocks. Toward theend of the CAS period of fiscal 2004–07, with thesharp rise in primary commodity prices, the fed-eral government’s position improved dramati-cally, which sharply reduced demand for Banklending.

Reflecting on these changes, the 2008 CountryPartnership Strategy (CPS) (World Bank Group2008a) proposed a much smaller federal pro-gram, largely consisting of technical assistanceloans, some SWAps, and programs that promotedsynergies across federal and state lending (forexample, education and water resource manage-ment). The majority of financing (70 percent)was to be directed to state programs, which werein compliance with the FRL. This emergingstate–dominated program was branded as onebased on “principled opportunism,” where stategovernments interested in working with the Bank

would define their development pri-orities and main challenges, while theBank would present the options (in-struments) it could offer, based on itsanalytical work and experience in Braziland elsewhere. Another significantchange in the 2008 CPS was the at-tempt to better coordinate the Bank’slending cycle with the political cycle at the statelevel.20

IndiaThe 1950 constitution established the Indian Re-public with a two-tier federation of states andunions; today it consists of 28 states and 7 unionterritories.21 The center is traditionally strong andexercises control over the most significant spheresin the economy. Since the early 1990s, several factors have contributed to greater decentraliza-tion and strengthening of the federal system. First,the overall trend to liberalize the trade and in-vestment regime in India led to increased com-petition between states to attract new businessesand investments. Second, the decline of the oncenationally dominant Congress Party andthe emergence of regional political par-ties distributed power. Third, a 1992amendment to the Constitution addeda third tier of local self-government—the panchayats.

Until the 1990s Bank engagement at the statelevel was mainly a matter of the location of sec-toral projects in infrastructure, agriculture, and thesocial sectors. This was determined by the sectoraldialogue with individual states and the interestsof the central government.22 Only after informaldirect negotiations (subsequently formalized in tri-partite agreements) were allowed couldthe Bank consider the option of directengagement with the state govern-ments. A mid-1990s CAS emphasized,for the first time, the need to focus ef-forts on state-level sector and fiscal ad-justment issues.

A second mid-1990s CAS introduced a strategy offocusing on reforming states (later called focus

WHICH STATES? EVOLUTION OF THE BANK STRATEGY

1 3

After 2003, the Bankfocused on lending tostates with higher levels ofpoverty and shifted awayfrom adjustment lendingin favor of multisectoralinstruments.

More recently, the focuson state-level lending hasincreased as the need forfederal-level lending hasdeclined.

In the 1990s,decentralization andother factors createdan environmentconducive to state-levelengagement in India.

states). The timing of this shift was significant. Ingeneral, the states were in serious financial diffi-culties, with combined fiscal deficits graduallyclimbing from 2.28 percent of gross domesticproduct (GDP) in 1993–94 to 2.85 percent in1997–98, and eventually to 4.17 percent in1998–99. The central government faced increas-ing pressure from states for special bailout pack-ages. Given the fiscal problems of the centralgovernment, it was not only open but keen to findways of sorting out the problems of state finances.Hence, when the Bank decided to direct its as-

sistance to reforming states, both thecentral government and several stateswere eager to do business.23, 24

The concentration of Bank effort in a few pro-gressive states had four main justifications. First,aid was most effective when used in a good pol-icy environment (Burnside and Dollar 1997). Sec-ond, it would have a demonstration effect, signalingto other states the benefits of reform and demon-strating the returns to specific policy changes orinstitutional development in the selected states,which could then be rolled out in others. Third,in a vibrant democracy such as India, it seemed tomake more sense to support willing reformers.Fourth, it enabled the Bank to be selective: it waslikely to be more efficient and effective for the Bankto focus on a limited number of states rather thanto spread itself thinly across many.

Among the reforming states, Andhra Pradesh wasone of the first to promote reform and fiscal ad-justment and the first to reach out to the Bank forassistance in this endeavor. As a result, AndhraPradesh was the natural choice for a focus state.The culmination of the Bank–Andhra Pradeshpartnership led to the Bank’s first subnationalpolicy-based loan in India:25 the Andhra PradeshEconomic Restructuring Project. This massivemultisectoral investment project, underpinned

by an agreed multiyear fiscal frame-work with a total loan/credit value of$540 million, was approved in May 1998.Andhra Pradesh also benefited from anumber of other investment projects.In 2000, the Bank reported $1.5 billionin commitments to the state.

The major change in strategy around the millen-nium relative to the mid-1990s was the official en-dorsement of adjustment lending as an instrumentto pursue the focus state strategy.26 The Bank’ssupport to cross-cutting reform programs in thefocus states also generated interest from otherstates. In two cases (Orissa and Tamil Nadu) thisinterest led to agreement in principle with the central government to move toward adjustmentlending.27 In other cases (Maharashtra, Punjab, and Bihar) it was agreed instead that the Bankshould provide analytical support for cross-cuttingreforms.

Even so, there was growing concern that laggingstates were being overlooked in the Bank pro-gram. The implementation review of the millen-nium CAS (World Bank Group 2004a, prepared in2004) found that the focus state approach was toonarrow and left the bulk of the poor unaffectedby Bank activities.28 At about the same time, Indiaadopted ambitious targets to achieve the MDGs,and the performance of the lagging states withlarge concentrations of poverty was essential inthis regard. Hence, the core strategic issue for the2004 CAS became how to scale up impact in a na-tional context (table 2.3).

The 2004 CAS proposed a change from the focusstates approach to a broader focus on the 12largest and poorest states. It proposed four waysof engaging in states. First, it proposed openingdialogue with the largest and the poorest stateson the cross-cutting reforms that are the focus ofadjustment lending (fiscal management, gover-nance, service delivery, the power sector, and in-vestment climate). Second, more resources werepromised for the four poorest states with theweakest public institutions—Bihar, Jharkhand,Orissa, and Uttar Pradesh. Third, state-level DPLswere targeted to reach 15 percent of total lend-ing. Finally, there would no longer be an upfrontdecision to concentrate substantial state-level in-vestment lending on focus states that were alsoreceiving policy-based loans in support of cross-cutting reforms. Instead, investment lendingwould be channeled to states that were able tocomply with the federal guidelines for specificsector engagement.

1 4

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

The Bank initially focusedon progressive states.

As concern began to growthat lagging states were

being overlooked, theBank shifted to a broader

focus on the largest andpoorest states.

In the end, the buildup of state lending envisagedduring the 2004 CAS period did not take place. Outof the seven state-level adjustment lending op-erations (SALs) planned, five were approved, butthe total was below the target of 15 percent of totallending.29 Single-state loans to the four pooreststates fell from about 14 percent of total lendingvolume to about 9 percent during the same pe-riod.30 In contrast, the stock of outstanding com-mitments directed to the three previous focusstates—Tamil Nadu, Karnataka, and AndhraPradesh—increased from 22 to 24 percent. Muchof the operational engagement during fiscal2004–08 (an average of 20 percent of total lend-

ing volume) was linked to the signifi-cant expansion of Centrally SponsoredSchemes.31

At the request of the central govern-ment, the Bank intensified its programfor low-income/lagging states underthe 2008 CAS (World Bank Group 2008c). This timethe Bank stressed selectivity and the need to de-velop intensive engagement (programmatic DPLs,sector investments, technical assistance, and In-ternational Finance Corporation services) in onlythree low-income states, which were lagging butalso reform minded. Programs in other low-income

WHICH STATES? EVOLUTION OF THE BANK STRATEGY

1 5

Table 2.3: Evolution of Bank Engagement in India, Fiscal 1998–2009

1998–2001 2002–04 2005–08 2009–12

Millennium CAS 2004 CAS andMid-1990s and 2003 CAS 2007 CAS

Category strategy Progress Report Progress Report 2009 CAS

Bank strategy

Priority states

Major instruments/ milestones

Portfolio (in dollar terms)

Focus StatesEngage with states thathave chosen to embark ona comprehensive programof economic reforms.

Andhra Pradesh

The first subnationalpolicy-based lending isdelivered using amultisector investmentlending approach.

States: 54% Central/federal: 46%

Focus StatesReinforce reforms infocus states withselective interventions in other states.

Andhra PradeshKarnatakaUttar PradeshTamil Nadu(added later)

Subnational DPLs areintroduced.

Focus states: 34%Other states: 44%Central/federal: 22%

Lagging StatesOpen up new engagements with thelargest and poorest states.

BiharJharkhand Uttar PradeshOrissa

Lending to CentrallySponsored Schemesincreases significantly.

Low-income states: 9%Other states: 36%Central/federal: 54%

Lagging StatesIntensify engagement withlow-income states that arelagging but reform-minded.

BiharUttar PradeshOrissa

Programmatic DPLs andsector investment loans forlagging low-income states(Bihar, Orissa, and UttarPradesh).

Sector investment loans foradvanced low-incomestates.

Low-income states: 29%Other states: 27%Central/federal: 44%

Source: World Bank country strategy documents.Note: The portfolio for fiscal 2009–12 shows expected allocations

The envisaged buildup in state lending did notoccur and in the 2008 CAS the Bank intensifiedits focus on the pooreststates.

states would be limited to sector investments anddialogue with the Bank. In more advanced/higher-income states, the focus would be on helping tostrengthen institutions so they could deal withemerging middle-income challenges, relying on In-ternational Bank for Reconstruction and Devel-opment (IBRD) lending, cutting-edge analyticalwork, and International Finance Corporation (IFC)activities for private sector clients.

NigeriaNigeria is a three-tier federation consisting of 36states, the Federal Capital Territory, and 774 localgovernments. The three tiers have overlapping re-sponsibilities; subnational governments accountfor a substantial part of fiscal activity but have be-come over-dependent on federal transfers.

Bank activities in Nigeria came to a standstill dur-ing 1993–99, amid deteriorating governance underthe military regime. During this period, the Bankremained engaged through supervision of proj-ects already being implemented and a limitedamount of analytic work. The Bank quickly reac-tivated its program after a democratically electedgovernment assumed power in May 1999. Since

that re-engagement, Bank strategy haspassed through two phases: the pe-riod of interim strategies, 1999–2003,with short-term focus;32 and the pe-riod following the adoption of a fullCPS in 2004 (World Bank Group 2005a).

Under the interim strategies, Bank lending at thestate level was dispersed across the country: proj-ects were essentially sectoral programs. Since itwas impractical to carry these out in all 36 states,the Bank attempted to choose a subset of states,usually determined on the basis of the Bank’sknowledge of and dialogue with the state andthe interest of key ministers or officials. How-ever, the Bank was constantly under pressurefrom the central government to expand the num-ber of states covered under any project, with the

federal government insisting that onestate in each of the six broad geo-graphic regions of the country be in-cluded for parity reasons. This oftencreated serious problems for the Bank

in project supervision and contributed to weakportfolio performance.33 There was no incentivemechanism in place for the state governments tocompete for resources, and no correlation be-tween state reform efforts and the resources avail-able to them.

The Bank soon realized that it was spreading itsresources too thinly to the states and that a moreselective approach, based on competition amongstates for the Bank’s resources, could be benefi-cial for the overall impact of Bank interventions.As a result, the Bank made significant efforts toengage reformist states, Lagos in particular.34 Theidentification of Lagos as a priority under the lastInterim Strategy Progress Report (fiscal 2004;World Bank Group 2004a) was an attempt to co-ordinate the various efforts of the Bank’s sectorunits to derive synergies in Nigeria’s largest andmost important state.

The Bank’s strategy formally moved to focus onwell-performing states (or lead states) during theperiod of the fiscal 2005–2009 CPS. Following thelead states approach, financial and technical as-sistance would be designed to leverage state ef-forts and resources in the selected states to boosteconomic activity and improve social service delivery. Lead states would be able to access a “per-formance package,” a more programmatic, cross-sectoral approach to both analytical work andfinancing, drawing on both IDA and U.K. De-partment for International Development (DFID)35

resources. It was expected that SWAp-type oper-ations would be developed for the lead states as well.

In selecting lead states, the Bank relied on thebenchmarking process of the government-ledState Economic Empowerment and Develop-ment Strategy (SEEDS). Participation in theprocess was voluntary for the states, which wereranked in four areas: policy; fiscal managementand budget process; service delivery; and com-munication, transparency, and corruption. Fivestates—Cross River, Enugu, Kaduna, Kano, andLagos—were selected based on poverty level, re-gional importance, and previous engagement(table 2.4).

1 6

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

The Bank re-engaged withNigeria at the end of the

1990s with state-levellending disbursed across

the country.

To better focus itsresources, the Bank optedto have the states compete

for them.

Nigerian counterparts had opinions that differedfrom those of the Bank on the value and modal-ities for the lead states approach. First and fore-most, the concept was challenged for excludingthe poorest states. In practice, the focus on re-forming and well-performing states limited ac-cess for poor states to the assistance and supportthey needed from the Bank, since almost by def-inition they have less technical and financial ca-pacity.36 Second, there was an arbitrary elementto the ranking of states, which in some cases con-

tradicted the common knowledgeabout front-runners in both perfor -mance and quality of services. Third, inaddition to the 36 states with a highlevel of independence and authority, the federalgovernment attached a great deal of weight to thebalance among the 6 geopolitical zones in devel-oping its policies. Because only four of the six geo-political zones were represented in the selectionof the five lead states, the concept was perceivedas flawed.

WHICH STATES? EVOLUTION OF THE BANK STRATEGY

1 7

This approach evolvedinto a focus on well-performing lead states.

Table 2.4: Evolution of Bank Engagement in Nigeria, Fiscal 1998–2008

1993–99 2000–04 2005–09

2009 CPS andCategory Interim Country Strategy 2008 CPS Progress Report

Bank strategy

Priority states

Portfolio(percentage of total volume, end of period)

The Bank has no new lending activities in Nigeria as a consequence of poor governanceduring the military dictatorship.

None

None

Reengagement in NigeriaThe Bank reengages in Nigeria in May2000 with a wide-ranging program ofinvestment lending after ademocratically elected governmentassumes power in May 1999.

Gradual focus to reforming statesInitial attempts to guarantee nationalcoverage diluted the Bank resourcesavailable for each state. Lagosemerged as a priority state (after 2002)in an attempt to coordinate efforts inone large and important state forgreater impact.

Lagos

Federal projects: 31 percent

State projects—centrally designed for rollout to all states: 58 percent

State project—tailored to the needs of specific states: 11 percent

Lead StateThe Bank formally shifts its focus totop-performing, reform-minded states;that is, lead states. Lead states areselected in early 2006 based on thegovernment’s SEEDS benchmarkingprocess.

Semi-lead statesSeveral nonlead states demonstratestrong demand and commitment tosector reforms. As a result, projectsdesigned for lead states areimplemented in nonlead states, knownas semi-lead states.

Lead statesCross River, Enugu, Kaduna, Kano, andLagos

Semi-lead statesBauchi, Kwara, Osun

Federal projects: 38 percent (expected)

State projects—centrally designed for rollout to all states:39 percent (expected)

State project—tailored to the needs of specific states:23 percent (expected)

Sources: World Bank documents.

As soon as the selection was com-pleted, some nonlead states started tochallenge the selection. In many cases,they were making the case for en-gagement in specific sectors, wherethese states’ governments had man-

aged to demonstrate commitment to reformsand even achieve visible results. As a result, thelead states approach rapidly became diluted, andprojects that were designed for lead states wereimplemented in nonlead states (referred to assemi-lead states). Examples include an educa-tion project in Kwara, a rural roads project inOsun, and a state governance and capacity build-ing project in Bauchi. Concern was not limited toneglect of the lagging states; it extended to thepossibility of the annual selection process re-sulting in frequent changes in classification andinstability in donor interventions from the view-point of a state. For example, Cross River, ini-tially chosen as one of the lead states, will ceaseto be so with the new CPS coming into force. FromCross River’s perspective, this created a disrup-tion in the amount of Bank lending it could ex-pect. At the same time, many observers admit that

the lead state principle has had severalpositive effects, including inducingsome nonlead states to invest in im-proving public institutions.

The CPS Progress Report (fiscal 2008; World BankGroup 2008b) noted that the Bank would con-tinue to implement the lead state approach andwould use engagement in other states to informits decision on whether to expand into other leadstates when the next CPS is prepared.37

RussiaThe Russian Federation consists of 83 constituentunits that are referred to as subjects of the fed-eration or regions.38 The intergovernmental sys-tem has been undergoing a series of changessince the early 1990s. Subnational units, which

traditionally had a marginal set of responsibilities, suddenly found them-selves having to undertake more man-dates with fewer resources.39 In the1990s, excessive expenditure obliga-tions led regional governments to ac-cumulate overdue liabilities.

The period after 2000 was marked by the strength-ening of the federal government’s position: thefederation was subdivided into seven federalokrugs,40 each headed by a plenipotentiary presidential envoy; the governors were to be ap-pointed by regional legislatures following presi-dential nomination. Income disparities amongregions became especially pronounced. In 2005,per capita gross regional product in one of therichest regions (the oil-producing Tyumen oblastin Siberia) was about 69 times higher than that ofthe poorest region (Republic of Ingushetia in theNorthern Caucasus). In 2006, per capita revenuebefore transfers in the richest region was 151times that in the poorest region.41

Uneven distribution of industrial capacity and thecolorful tapestry of multiethnic and multilingualgroups add another layer of complexity to re-gional inequality. Industrial production is con-centrated in the European part of Russia, mostlyin Moscow and St. Petersburg and their vicini-ties, as well as along the Volga River and in the UralMountains, while a large portion of the country’snatural resources, including oil and gas, is lo-cated in Siberia.

The Bank’s first two CASs for Russia in the mid-1990s emphasized the role of the newly emerg-ing private sector in promoting Russia’s transitionto a market economy. One of the specific objec-tives of the second of the two CASs (World BankGroup 1999) was to promote private sector de-velopment through regional infrastructure proj-ects. Regions’ participation in these projects wasconditional on demonstrated commitment to thereforms needed to improve long-term credit-worthiness. Lending to the regions, however,proved to be difficult, because only one of the fourplanned large infrastructure projects at the re-gional level was approved.42

Based on this experience, the 1999 CAS found thatthe strategy of lending to the regions was pre-mature. It concluded that “regional approachesmay well become appropriate at a later timewhen efforts to improve their basic financialmanagement and soundness have been clarifiedand fiscal and administrative relations betweenRegions and the federal government have ma-

1 8

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

Nigerian counterpartsargued against the

approach because itexcluded the poorest

states.

Hence, the lead state approach was

quickly diluted.

The first CASs for Russiafocused on the private

sector through regionalprojects, an approach that turned out to be

premature.

tured. (World Bank Group 1999, paragraph 50).Accordingly, the CAS recommended a shift in em-phasis toward activities aimed at rationalizing federal-regional fiscal relations and improvingbasic management at the local level. In addition,the CAS stressed that the Bank “should addressthe key agenda of subnational reform morethrough systemic reforms via the federal levelthan through large, regional based projects whichare very expensive to prepare” (World BankGroup 1999, paragraph 103).

During this period, two federal projects43 that fo-cused on fiscal reforms and public sector man-agement at the regional level were approved. Thenovelty of these projects was that they piloted acompetitive approach for selecting the partici-pants. Regions were to be chosen based on demon-strated improvement of quality and efficiency ofregional fiscal management mechanisms.44

Both the 2005 CAS Progress Report (World BankGroup 2005b) and an earlier CAS inched towardmore emphasis on development issues at the

subnational level.45 The 2007 CPS (World BankGroup 2006) added a finishing touch: the plan for gradual shift to the new modalities of coop-eration and instruments based on the Bank-widestrategy for engagement with middle-incomecountries. While the core program of activities wasto focus on traditional instruments,46 some re-sources were to be invested in developing newareas of cooperation, such as directsubnational lending without sovereignguarantee (jointly with IFC) and reim-bursable technical assistance (fee forservice) (table 2.5).

The 2007 CPS identified groups of regions basedon five criteria: willingness and commitment towork with the Bank, history of successful coop-eration, reform-orientation and competence,strategic importance and the possibility of scalingup in other similar regions, and creditworthinessand potential interest in Bank operations (forwealthier or middle-income regions). Regionswere chosen from three groups—high income,middle income, and poor. For the three high-

WHICH STATES? EVOLUTION OF THE BANK STRATEGY

1 9

Table 2.5: Evolution of Bank Engagement in the Russian Federation, Fiscal 1998–2008

1998–2009 2000–02 2003–06 2007–09

Early 2000s CAS 2007 CPS1999 CAS and and 2005 CAS and 2009 CPS

Category Mid-1990s CAS 2001 CASPR Progress Report Progress Report

Bank strategy

Progress/major developments

Focus on reforming regions.Large regional investmentloans in infrastructure.

Lending to the regions doesnot progress as planned,resulting in approval ofonly one regional project.

Regional approaches are not appropriate forRussia Federation.Subnational reformswould be targetedthrough systemic reforms through the federal level.

Two large federalprojects (fiscal 2000 and2002) targeting regionalpublic sector reforms areapproved.

For the first time, regionshave to compete forselection.

Focus on well-performingand creditworthy regions.

Two region-specific DPLsare approved, one in St.Petersburg (fiscal 2003),the other in Kazan (fiscal2005).

Deepen direct involvement inthe regions by identifying asubset of 6–10 regions.

Type of Bank support wouldbe based on the income levelof the selected regions.

New instruments forsubnational engagement aredeveloped and implemented:

1. Subsovereign loanswithout sovereignguarantees.

2. Reimbursable technicalassistance (fee-for-service).

Source: Bank country strategy documents.

CASs in the early 2000sput greater emphasis onsubnational developmentissues.

income participants, cooperation wasfocused on fee for service, with possi-ble direct subnational lending. The 10middle-income regions would be eli-gible for subnational lending, with feefor service on selected issues. Finally,the low-income group, including 11regions from the Southern FederalOkrug (not eligible for subnationalborrowing) would be able to benefit

from Bank-supported federal projects imple-mented in these regions, as well as grants and AAA.

Reimbursable technical assistance hasrecently attracted a great deal of in -terest among Russia’s regions.47 Sub -sovereign loans without sovereignguarantees are also slowly gainingground.48

ConclusionsFollowing the crises of late 1990s, the economicsituation improved substantially in all four coun-tries reviewed, and federal governments becameless dependent on foreign financing.49 At thesame time, considerable improvement in states’fiscal stances (increasing primary surpluses anddeclining debt/revenue ratios) generated fiscalspace. In this new environment, states were al-lowed to seek financing for their investment pro-grams, as long as fiscal constraints, established atthe federal level, were satisfied. For the Bank,this was an important development, because fed-eral governments were scaling back on borrow-ing from the Bank (Brazil, Russia). Adapting to thisnew policy environment, Bank strategies in largefederal countries proposed a major expansion instate-level engagement.

In Brazil, the fiscal 2008 CPS (World Bank Group2008a) followed the approach of “principled op-portunism,” which focused on a technical assis-tance program of modest size with the federalgovernment and a major demand-driven lendingprogram with states. Bank assistance focused onsome of the more prosperous (such as Rio deJaneiro, Rio Grande do Sul, Minas Gerais, andSão Paulo) or reformist states (Bahia, Ceará).Bank assistance was generally demand-driven,

conditioned on the perceived commitment andownership of reforms and fiscal responsibility.

Although the Bank initially attempted to expandinvestment lending, this proved cumbersomegiven the two-tier approvals required by the stateand the federal governments. As a result, by 2008the composition of state lending in Brazil hadshifted toward cross-sectoral operations in supportof economic policies and public sector reforms,such as the first DPL for the state of Minas Gerais(2006), and the innovative Ceará and Minas Gerais’multisector SWAps (2006 and 2008, respectively).

In India, following the mid-1990s CAS, the Banksubstantially shifted its focus to state-level en-gagement. The timing of this shift was significant,because states were facing financial problems andboth the federal and state authorities were keento tap into Bank’s resources and take advantageof technical assistance. The Bank decided to ini-tiate major involvement in progressive reform-ing states—the focus states approach—initiallyselecting Andhra Pradesh, Karnataka, and UttarPradesh for this purpose.

In 2004, the Bank CAS signaled a change of strat-egy, noting that the focus on reforming stateswas causing neglect of the lagging states. TheCAS signaled the intention to provide technical as-sistance to the lagging states and to try shiftinglending to them as well. This proved difficult toachieve. The 2009 CAS completion report notedthat, in practice, while lending at the state levelremained a large share of the overall program, theshare of lagging states had actually declined.

In Nigeria, the Bank reactivated and intensified itslending activities after return to civilian rule in1999, and the project portfolio rose from $80million in 2000 to $750 million in 2007. During thatperiod, Bank strategy passed through two phases:the first was a period of interim strategies (fiscal2000–05) following reengagement; the secondwas covered by the fiscal 2005–09 CPS, when theBank adopted a medium-term focus. Engage-ment at the state level in Nigeria was driven largelyby social and poverty reduction agendas, with

2 0

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

From 2007 to 2009, the Bank deepened

its involvement in theregions, but withselectivity based

on willingness and commitment,

creditworthiness, andreform orientation.

As the states’ fiscalstances improved in the 1990s, they were

allowed to seek financingfrom the Bank.

focus on improving infrastructure and providingsupport for agricultural and rural development.During the period of the fiscal 2005–09 CPS (WorldBank Group 2008b), the Bank’s strategy formallymoved to focus on well-performing states, calledlead states, seeking to leverage state efforts andresources by granting them access to a perfor -mance package. Five states were selected based on the government-led SEEDS benchmarkingprocess. The lead-state approach is currentlyunder review.

While a mid-1990s CAS for Russia proclaimedgreater emphasis on regional investment proj-ects (despite recognition that they were expen-sive to prepare and supervise), a CAS near the endof the decade outlined a phased shift in lendingaway from investment projects in infrastructureand energy in favor of increased emphasis onsystemic aspects of institutional development. ARussia CAS in the early 2000s continued the strat-egy shift, emphasizing support for reforms at theregional level, particularly to strengthen public sec-tor management. The 2005 CAS Progress Report(World Bank Group 2005b) stated that work at theregional level was to be multisectoral in nature andwould concentrate on a small number of regions.The 2007 CPS (World Bank Group 2006) addeda finishing touch: the plan for a gradual shift tothe new modalities of cooperation and new in-struments, such as the subnational facility that al-lows the Bank Group to provide funds without asovereign guarantee to states and municipalitiesand provision of technical assistance on a reim-bursable basis (fee for service).

Overall, the Bank’s intent to invest more in re-ducing poverty and building capacity through en-gagement at the state level in large federal countries

was sensible. In most cases it was an easydecision to make, because federal gov-ernments significantly reduced theirborrowing from the Bank and provi-sion of many important public servicesis the responsibility of state governments in mostof these countries. In this context, reforming thecapacity of state governments to manage their fis-cal resources was a critical entry point for state-levelengagement; in some cases it was a prerequisite.Once the Bank decided to engage at the statelevel and defined its objectives to support fiscal re-form and poverty reduction in those states, theissue became how to do this effectively. It was im-possible to engage in every state, sothe Bank had to be selective. But thebasis for selectivity has proved one ofthe most difficult issues to resolve. Ten-sion often arose between supportingprogressive states to carry on with re-forms and helping the poorest states.Various approaches have been adopted to takethese factors into account. The tension is most ap-parent in India, where the pendulum has swungfrom one criterion to the other during the period.

One approach to reconciling the two selection cri-teria is to treat them as two different strands orobjectives in the Bank’s work. First, the Bank hassupported fiscal reform both with regard to cen-ter/state fiscal relations and reform of state-levelfinances. Second, the Bank engaged strategicallyat the state level, trying to adapt the instrumentsat its disposal (loans and analytics) to supportthe broader development/poverty reductionagenda. The different approaches taken by theBank in the four countries will be looked at fromthese two perspectives in the next chapters of thisreport.

WHICH STATES? EVOLUTION OF THE BANK STRATEGY

2 1

The main issue was howto do this effectively andhow to select states forengagement.

The Bank’s intent toinvest more in reducingpoverty and buildingcapacity by engaging atthe state level wassensible.

Chapter 3

• The Bank provided support for fiscalfederalism and for improved statecapacity to plan and manage rev-enues and expenditures.

• Political economy issues make it dif-ficult for the Bank to engage in fiscalfederalism, but it can do more than ithas in the four countries studied.

• The Bank’s efforts in support of fiscalreforms at the state level have re-sulted in positive reforms in all fourcountries, but the outcomes are unclear.

• While the Bank had a clear and ac-cepted federal-level strategy for stateengagement, it rarely had a state-levelstrategy for engagement. Where it did,the strategy did not cover all the stateswith which the Bank engaged.

Workers from the Medniy copper processing plant walking home after their shift.Photo by Yuri Kozyrev, courtesy of the World Bank Photo Library.

2 5

The Scope ofBank Engagement

The decision about which states to engage with(for example, in support for agriculture and ruraldevelopment in India or education in Brazil) wassometimes a strategic choice, but more often amatter of historical engagement or the availabil-ity of analytic work, based in turn on opportunisticinvolvement of the Bank in particular states. In thenew context, the Bank was increasingly steeringtoward a new model of engagement with twodistinct elements: support for fiscal reform andbroader multisector engagement at the state level.

Fiscal ReformIn the fiscal area, the Bank provided two categoriesof support: that for fiscal federalism, addressingthe fiscal relationship between the federal andstate governments; and specific support for stategovernments to improve their capacity to plan andmanage their revenues and expenditures.

Fiscal Federalism1

The fiscal relations between federal and state gov-ernments can be broken down into four broadareas. The first is the allocation of revenue au-thority between the federal and state govern-ments. In most countries, the bulk of taxes arecollected centrally, and even where sharing rev-enues with the states is automatic, the states haveno legislative control over the policies and ad-ministration that govern taxes. The second istransfers from the center to states,2 which are

usually either formula-based or discretionarytransfers to fund federally mandated programs.The third is allocation of responsibilities for pub-lic expenditures between the federal and state governments, which covers most of the majoreconomic and social sectors. The fourth is the ca-pacity of state governments to run deficits and bor-row to meet those deficits.3

Revenues. The central government normally col-lects all taxes on external trade. Practice differs withregard to personal income tax and value added andexcise taxes. In general, state and local govern-ments are permitted to levy sales taxes and taxeson property, both immoveable and moveable, aswell as to collect for local licenses and fees.

However, there is a vertical imbalance in the fourcountries studied—that is, the share of tax rev-enues collected by the central government sub-stantially exceeds the federal share of expenditures,and vice-versa for the state level. There are threerationales for this. First, it is generallymore efficient for the federal govern-ment to collect taxes; that is, the costof collections per dollar raised will belower. Second, there needs to be equal-ization across states; that is, part ofthe resources raised from taxationshould be transferred from richer statesto poorer ones. Third, the central gov-

A nother issue for the Bank was the scope of engagement at the state level. In Brazil, India, and Nigeria, the Bank had carried out numerousstate-specific projects as part of its support for nationwide sectoral

programs.

In the countries studied,the share of taxescollected by the federalgovernment is muchlarger than its share ofexpenditures, requiringsignificant revenuetransfers to the states.

ernment needs a role in directing resources at thestate level to programs that are considered nationalpriorities.

Transfers from the center to the states. Trans-fers usually have two components. The first isblock or unconditional grants that are providedbased on formulas that generally give the great-est weight to population, but also include equal-ization mechanisms, which allocate more fundson a per capita basis to states with lower percapita incomes.4 Sometimes the transfers also in-clude an incentive element that ties them to thestate’s own revenue efforts or its willingness to en-gage in fiscal reform. A second set of transfers aread hoc and are for specially defined purposes.These may have some criteria or formulas asso-ciated with them, such as matching grant pro-grams, or they may be discretionary grants fromline ministries and not necessarily nationwide inscope (box 3.1).

Expenditures. The allocation of expenditure re-sponsibilities between the center and states usu-ally relates to the locus of programs. For example,primary education is typically a responsibility ofstate or local governments, although in India thefederal government’s frustration with the slow

pace of achieving the education MDG led to theinvolvement of the national government at the pri-mary level (box 3.1). Federal responsibility in-creases as one ascends the education ladder. InNigeria, this happens early, with joint responsibilityfor secondary schooling. In the other countries,secondary schooling tends to be a state respon-sibility, but there are exceptions for specializedschools and disadvantaged regions. There is gen-erally a major federal role in tertiary education. Inmany areas, states are subject to unfunded man-dates from central legislation that require them toundertake programs, but no funding is provided.

Another element of expenditure that is not fullyunder the control of the state government is thatof public sector salaries. While in theory state bu-reaucrats’ salaries are independent of those paidby the federal government, in practice it is im-possible for state governments to resist the pres-sure to match salaries with those of federalofficials. In the past few years, federal govern-ment salary increases in India and Nigeria have se-riously worsened the financial situation of thestate governments.

Deficits, borrowing, and debt management.Practice varies on the treatment of deficits and the

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WORLD BANK ENGAGEMENT AT THE STATE LEVEL

Since 2000, the Indian government increasingly has used ear-marked matching grants to states for special purposes—calledCentrally Sponsored Schemes. The largest of these is the Edu-cation for All Initiative. The incentive provides major funding forprimary education, but instead of being channeled through stategovernment budgets, it goes directly to special parastatals (district-level societies) that the state governments were re-quired to set up to be eligible to receive these funds. Other majorCentrally Sponsored Schemes now include the countrywideschool meal program, the National Village Roads Scheme, the Na-tional Rural Health Mission, and the National Rural EmploymentGuarantee Scheme. The Indian government has also used theseschemes to secure reforms in other areas, such as state taxes.For example, funding for the Jawaharlal Nehru National Urban

Renewal Mission was made conditional on state governments re-ducing stamp duty rates.

In Russia, the number of designated National Projects has been increasing since 2005. These are sets of targeted programscofinanced by regional governments. They are aimed at imple-menting the main constitutional guarantees that are under the jointjurisdiction of the federal government and the regions—that is,education, health care, affordable housing, and agricultural de-velopment. These are funded through earmarked capital transfers.

In both countries there is considerable debate about whetherthe high proportion of funding through these schemes and theloss of autonomy in expenditure allocation at the state or repub-lic level, as well as the conditionalities associated with them, runcontrary to the spirit of federalism.

Box 3.1: Increasing Use of Earmarked Transfers in India and the Russian Federation

Sources: IEG consultant reports and mission interviews.

borrowing capacity of state governments overtime both within and across countries. Borrow-ing presents a particular problem. On the whole,federal governments are open to the idea that better-performing state governments or their op-erating enterprises should be able to go to themarket to borrow without a sovereign guaranteeand for the markets to impose discipline. Wherestate governments are able to borrow from thebanking system without federal guarantees, theyhave sometimes incurred high levels of debt thatthey were unable to service. In these cases the fed-eral government has invariably been forced tostep in and meet the states’ deficits so that, in ef-fect, there has been a sovereign guarantee forsuch borrowing. For this reason, where states ortheir operating enterprises are allowed to borrow,there are usually federal oversight mechanisms inplace requiring approval of the borrowing.

In Brazil, there was a considerable expansion ofsubnational indebtedness from the 1980s to themid-1990s, mainly through loans from state offi-cial banks and bond issues. In 1989 the federal gov-ernment assumed part of the states’ externaldebt, equivalent to 2 percent of GDP. This bailoutproved insufficient, and in 1993 there was a sec-ond debt bailout equivalent to 7.2 percent of

GDP. By the mid-1990s inflation wasabove 2000 percent a year and the RealPlan was introduced, which succeededin establishing financial control andprice stabilization. However, price sta-bilization limited the growth of thestates’ revenues, and the failure to ad-just levels of state public expenditure,along with high interest rates, led to anunsustainable fiscal situation for many of them.This led to a third restructuring of state debts in1997. This time the restructuring was associatedwith formal agreements (the Fiscal AdjustmentPrograms, or PAF), legal measures, and fiscal andstructural reforms, which contributed to the sig-nificant improvement in state finances that tookplace after 2000 with the implementation of theFRL (box 3.2).

In India, the government maintains tight controlof all external borrowing and market borrowingthrough the issue of state government bonds.These require approval of the Department of Ex-penditure. The constitution forbids direct exter-nal borrowing by states and requires states toseek central approval for domestic borrowing aslong as they have outstanding debt to the centralgovernment.

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2 7

Where state governmentshave been able to borrowfrom the banking system,they have sometimesincurred high levels of debt requiring thefederal government tobail them out.

As part of their 1997 debt restructuring agreement, states signeda Fiscal Adjustment Program (PAF) and committed to meet nego-tiated targets on the financial debt/net real revenue ratio, a mini-mum primary surplus, maximum wage bill expenditure, minimumown-revenue collection, structural reforms and/or assets divesti-ture, and level of investment expenditures. The PAF is a three-yearrolling fiscal program, annually monitored by the federal govern-ment, and revised as needed, up to the 30 years during which thestate is under the obligations of the debt restructuring agreement.Of 26 states and the Federal District, only 2 states (Tocantins andAmapá), which had no significant outstanding debt, did not signthe agreement.

The PAFs have been a powerful instrument for fiscal and struc-tural reforms at the state level and for supporting macroeconomic

stabilization policies. Since the PAFs were signed, states haveshown significant improvement in most of the relevant indicators.There has been a reduction of debt ratios, increasing revenuecollections, and primary surpluses as a ratio of state net revenue.For some states, the proceeds from privatization were a significantcontributor to amortization of debt. The program has shown mixedresults with respect to structural reforms of the states, such as thesocial security system.

Although specifically designed to resolve the states’ debt cri-sis of the 1990s, PAFs have been critically important, paving the wayfor the adoption of the Fiscal Responsibility Law (FRL) in 2000,which brought a more strategic approach for a sustainable fiscalpolicy in the Brazilian federation.

Box 3.2: The Fiscal Adjustment Program in Brazil

Sources: IEG consultant reports and mission interviews.

In Nigeria, the debt management framework alsodistinguishes between external and domesticdebt. States cannot engage in external borrowingwithout federal approval and guarantees. Thefederal government borrows on behalf of statesand on-lends to them. States are expected to ex-ecute a subsidiary loan agreement with the fed-eral government. In domestic borrowing, somedomestic debts require federal guarantees, whileothers do not. However, there are guidelines foreach type of domestic debt. States have to com-ply with the guidelines that involve federal guar-antees. The level of compliance with guidelinesthat do not involve federal guarantees is suspect.

In Russia, state governments are allowed to bor-row without a federal guarantee, and indeed thefederal government has refused to issue guaran-tees for state government borrowing and hasstated clearly that it will not bail out states that en-counter problems in servicing their debt.5

There is a substantial political econ-omy dimension that makes fiscal federalism especially sensitive for gov-ernments. First, there is the problem ofthe cohesion of the federation as a

whole. Most federations are culturally diverse andthere are centrifugal tendencies that the centralgovernment tries to counter through the transfer

mechanism. Nigeria represents a particularly clearcase of the use of transfers to counteract such ten-dencies. Second, there are often more direct po-litical agendas dealing with the relationship ofthe party in power in the center with the party inpower at the state level. Third, there is the inter-est of the federal bureaucracy in maintaining sub-stantial say in how resources are allocated andused. Finally, there may be governance issues re-lated to the interest at various levels in capturingrents from revenue and expenditure authority.

These factors make fiscal federalism a difficultarea for Bank engagement. Where it has sensedopenness on the part of the authorities to lend-ing or analytic work, the Bank has attempted toengage. In Russia, the Bank had an intensive pro-gram of work on fiscal federalism in the late-1990s(see box 3.3). In Brazil, the Bank has undertakensome analytic work on these topics, including astudy of state debt (World Bank 2002a). A studycarried out in India on state-level fiscal reformhas some discussion of fiscal federalism issues(World Bank 2005b). In India, the Bank has alsofacilitated technical discussions of the Indian Fi-nance Commissions with internationally reputedresearchers and has contributed to the national de-bate through occasional seminars and confer-ences. In Nigeria, the Bank has kept away from thistopic, given its extreme political sensitivity.

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WORLD BANK ENGAGEMENT AT THE STATE LEVEL

Political economy issuesmake it difficult for theBank to engage in fiscal

federalism.

With the dissolution of the Soviet Union and the need to put in place new instruments and rules for the relationship between thecentral government and the regions and republics, the Bank un-dertook a substantial program of analytic work designed to stim-ulate and contribute to internal debate and policy formulation.

The studies published by the Bank included Russia and the Challenge of Fiscal Federalism (World Bank 1994), which outlinedthe nature of the center-regional issues and tensions and how awell-designed intergovernmental system could help reduce them;Fiscal Management in the Russian Federation (Le Houerou 1995);“Federal Transfers in Russia: Their Impact on Regional Revenuesand Incomes” (Le Houerou and Rutkowski 1996); and Subnational

Budgeting in Russia: Preempting a Potential Crisis (Freinkman,Treisman, and Titov 1999).

With a significant change in the approach to fiscal federalismthat took place in 1999, the Bank published a Policy ResearchWorking Paper on Decentralization in Regional Fiscal Systems inRussia: Trends and Links to Economic Performance (Freinkman andYossifov 1999). This was generally regarded as a major study of fiscal federalism in Russia. It promoted an intensive dialogue be-tween the Bank and the federal and regional governments onthese issues and laid the basis for the Regional Technical Assis-tance Loan at end-1999 and the Fiscal Federalism and Regional Fis-cal Reform Loan in early 2002.

Box 3.3: Analytic Work on Fiscal Federalism in the Russian Federation

Source: World Bank documents.

While the Bank clearly needs to consult closelywith the federal governments of the countriesconcerned to ensure the timing and nature ofany interventions in this area, there would seemto be three ways in which the Bank can go furtherthan it has to date. First, it can ensure that it hasthe in-house analytic capability and informationin this area and can indicate to the federal gov-ernment its willingness to act as an honest bro-ker should the government find this useful.Second, the Bank can undertake more analysis ofthe way in which the current system is working;that is, what the impact is on state-level incomeand expenditure, without taking a position onwhether or not the system should be changed.Third, the Bank can foster cross-country knowl-edge sharing on issues of fiscal federalism bybringing together policy makers and officials to dis-cuss the problems they have encountered andtheir approach to addressing them.

Fiscal Capacity at the State LevelIn the mid-1990s the federal governments ofBrazil and India, facing serious state deficits thatcontributed to overall macroeconomic instability,showed increasing interest in Bank engagementat the state level to support efforts for fiscal reform.6 The broad criterion was that the stateconcerned had to have the fiscal space to ac-commodate borrowing from the Bank, and thecarrot of Bank lending could therefore inducethe states to adopt the reforms needed to estab-lish and maintain fiscal space and facilitate theprocess through easing the adjustment.7

The determination of whether a state has fiscalspace varies from country to country. In Indiathis is assessed case-by-case by the Departmentof Economic Affairs, which reviews states’ re-quests for Bank loans. In Brazil the determinationis rule-based, with clear criteria established bythe FRL. In Nigeria, since Bank loans are passedon by the federal government as grants, this is notan issue. The overall Bank lending program isthe subject of consultation with the Ministry of Finance, and once this is agreed, the Bank goesahead with the individual projects identified as partof the CPS. In Russia, Bank funds intended topromote fiscal reform at the regional level (the Fis-

cal Federalism Reform Project) werepassed on from the federal govern-ment to the regions as grants, with theintention of maximizing their incen-tive effect. The Bank’s lending for fis-cal reform in Russia was based onselecting participating regions basedon fiscal performance.

The Bank’s support for fiscal reform hasfour major components: increasingstate revenues, use of an adjustment ap-proach, improved public expendituremanagement, and support for im-proved governance. The next sectionsdiscuss each of these.

Increasing State RevenuesThe Bank has a rather uneven record in sup-porting the efforts of state governments to in-crease their revenues. In Russia the Bank has hadmajor involvement in this area. In 1995, the Bankfinanced a first Tax Administration Project, fo-cused on the modernization of local tax offices inNizhny Novgorod and Volgograd. This was fol-lowed by a second Tax Administration Project in2002. In Nigeria, in the State Governance Proj -ect, support for improving tax policy and admin-istration was included in two of the three statescovered by the project (Bauchi and Kaduna) at thespecific request of the state governments. InIndia, the SAL/DPL programs have had a revenue-reform component. In both Andhra Pradesh andOrissa, the Bank expedited the introduction of thevalue added tax by making it part of the agreedconditions. In Andhra Pradesh there was alsoagreement on the establishment of a RevenueReforms Commission to talk out a tax and non-tax revenue reform program. In Orissa, the Bankrequired tax reforms in motor vehicle taxes, stampduty, property tax, and profession tax. Despite this,the view expressed by the Indian authorities is thatthis is an area where greater support from theBank would be welcomed. In Brazil this has notbeen a component of the Bank’s program, partlybecause of the support being providedin this area by the Inter-American De-velopment Bank (IDB) and the Inter-national Monetary Fund (IMF).

THE SCOPE OF BANK ENGAGEMENT

2 9

However, it can domore—ensuring that ithas the appropriatecapacity to analyze theway the current systemworks and by fosteringcross-country knowledgesharing.

Bank lending was aninducement for states toengage in reforms thatwould improve theirfiscal capacity.

The Bank’s record onsupport for increasingstate revenues is uneven.

One of the general impressions from all four coun-tries was that the Bank could well do more inhelping state governments improve and expandtheir revenue-generation activities. Almost all stategovernments need to reduce their dependence onfederal transfers and generate additional resourcesfor investments in physical and social infrastruc-ture. Perhaps even more important, the relationbetween revenue raising and the quantity andquality of expenditure at the state level needs tobe made clearer to the population of the state. De-mand for good governance is closely related to theconcern of the public that the money that they payin taxes is effectively used.

Use of an Adjustment ApproachThe Bank has generally linked its adjustmentloans at the state level to sound macroeconomicmanagement. In Brazil and India this linkage hassometimes been associated with an effort to turnaround a poor-performing state, so that the Bank

loan was made at a time when the fis-cal condition of the state was still prob-lematic. The counterfactual of Bankinvolvement in fiscal adjustment is verydifficult to determine, since relativelyrapid growth in all the countries in this

study during the period from 2000 to 2007 hasmeant that state finances have also improved sub-stantially. In Brazil all the states where the Bankhas been engaged have come into compliancewith the FRL. Meeting the relevant fiscal indica-tors was a trigger for the operations. In the CearáMulti-Sector Social Inclusion Development Proj-ect there were indicators for the primary surplusand revenue/GDP ratio. The Minas Gerais Devel-

opment Policy Loan followed a similarmodel, with up-front requirements onmeeting the conditions of the FRL andthe separate agreement with the Brazil-ian government (the so-called PAF)that the state had signed as a conditionof debt write-downs.

In India the evidence of the impact of Bank lend-ing on state-level fiscal adjustment is somewhatmixed. In the early period of its state strategy, theBank decided that it would try to engage with thegovernment of Uttar Pradesh, the first state to get

an adjustment loan from the Bank. However, therewas no follow-up, because the Bank’s partnershipwith Uttar Pradesh weakened amid frequent po-litical changes in state government and weaken-ing commitment to a program of fiscal reform.

In Andhra Pradesh the Bank determined that asubstantial part of the fiscal problem was the pro-vision of free or heavily subsidized electricity inthe rural areas. Attempts to condition lending ona lowering of subsidies proved politically infeasi-ble. In 2007 a detailed evaluation was done ofthe impact on fiscal adjustment of “Ten Years ofWorld Bank Sub-National Policy-Based Lendingto India” (Howes, Mishra, and Ravishankar 2007).The study (pp. 41–68) concludes that:

It is impossible to give a rigorous answer(to the question of the impact of state policy-based lending on state reforms). Per-formance against fiscal targets was largelyon-track. While non-PBL states also haveachieved some fiscal adjustment, overallPBL states adjusted faster and further thannon-PBL ones. We attribute this largely to theeffective screening put in place whichavoided the adverse selection problem oftenassociated with PBL, but also to the com-bination of lending, dialogue and moni-toring which helped place reform higher onthe political and bureaucratic agenda thanit would have been otherwise.

The authors claim that part of the achievement wasthat this supported the Bank’s focus state strategy,which “succeeded in its aim of creating a demon-stration effect across India’s states to build supportfor reforms.” But the evidence for this demon-stration effect is not provided, and the Bank itselfhas abandoned the focus state approach as inef-fective and as limiting its capacity to operate inpoorer states. On balance, the judgment must bethat while it is likely that there is a positive impacton fiscal adjustment through policy lending at thestate level, it is a modest impact at best.

In Nigeria, the Bank adopted the lead states ap-proach (along the lines of the India focus statesapproach), which proposed to allocate Bank lend-

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WORLD BANK ENGAGEMENT AT THE STATE LEVEL

Adjustment lending tostates generally was

linked to soundmacroeconomic

management.

The effects of the Bank’s efforts have

been obscured by the high level of growth in all four countries

during the period.

ing to states that met certain criteria for fiscal re-sponsibility, such as producing budgets and ac-counts within a certain time frame. The hope wasthat this would have a demonstration effect onother states, which would then also become eli-gible for lending from the Bank. There is no evi-dence to suggest that this has led either the leadstates or the other states to pursue fiscal reformwith more vigor (or less vigor in most cases) thanthey would have done otherwise. The Bank isnow considering the use of development policylending or multisector lending at the state level,which could be triggered by the passage of FRLs.

A similar approach was taken in Russia, where el-igibility for the Regional Fiscal Technical Assis-tance Loan and the Fiscal Federalism and RegionalFiscal Reform Project (FFRFRP) was determinedon a competitive basis, with criteria related to fis-cal performance and the quality of the reformprograms put forward. In the Russian case, the evi -dence seems much stronger for a positive impacton fiscal performance of the participating states.

Improved Public Expenditure ManagementA key part of the Bank’s engagement at the statelevel is to improve the quality of public expendi-ture management. This is an important area of theBank’s comparative advantage. In this context itis surprising that the Bank has carried out very few state-level Public Expenditure Reviews (PERs),with the possible exception of India, where PERswere often part of state-specific economic re-ports. While carrying out PERs for states is costly,it needs to be remembered that many of thesestates are substantially larger than most of thecountries where the Bank carries out analyticwork on public expenditures. In some countriesthere is still ambiguity about the relative respon-sibilities for expenditure between federal andstate governments. This is particularly so in Nige-ria, where, for example, both levels are responsiblefor secondary education. Again, this is an areawhere the Bank has not undertaken analytic workor taken a clear line, even in its lending programs,on the appropriate allocation of responsibility.

Aside from the issue of allocations, however, thereis also the much more significant question of im-

proving the quality of public expendi-ture management—that is, enhancedand timely budgeting, the use ofMedium-Term Expenditure Frame-works and outcome targeting, the ac-counting and auditing procedures,oversight by state legislatures, the im-plementation of treasury systems, stateprocurement, monitoring and evaluation, and soon. In Nigeria and Russia in particular, this hasbeen the core of the Bank’s efforts to support fis-cal reform at the state level.

Brazil. The Bank’s adjustment and multisectorloans in Brazil can be characterized as mainly sup-porting more effective state government pro-grams for growth and poverty reduction. Thespecific content of the loans was not fiscal, but,as indicated above, the operations were con-ceived with the fundamental objective of sup-porting the adjustment of the states’ investmentand expenditure programs to render them con-sistent with the requirements of the FRL. Meet-ing the relevant fiscal indicators was the trigger foreach operation.

Although the Ceará Multi-Sector Social InclusionDevelopment Project was considered very suc-cessful in meeting the agreed social and eco-nomic indicators, it did not address, for example,the existing state financial management and pro-curement systems, which are regarded as weak.The Implementation Completion Report notedthat a more proactive approach to supervision offinancial and procurement management wouldhave been beneficial (World Bank 2008a). TheMinas Gerais DPL laid the foundations for im-proved public sector management, helped in thestate’s fiscal turnaround, and enabled the stategovernment to successfully implement a results-based management system. These operations inCeará and Minas Gerais have had a powerfuldemonstration effect on other states, which haveshown a great deal of interest in learning moreabout the implementation of results-based ap-proaches to development management.

India. In the two focus states examined as part ofthis study, Andhra Pradesh and Orissa, the Bank

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3 1

Although improved publicexpenditure managementis a key part of the Bank’sengagement at the statelevel, it has done very fewPublic ExpenditureReviews for states.

agreed with the state government concerned tosupport a substantial set of reforms in public ex-penditure management. A first set of reforms re-lated to budget management, including the settingof hard budget ceilings, the aggregation of sub-heads for small programs to allow flexibility, andthe de-linking of departmental salary budgetsfrom programs to allow personnel reallocationand the closing down of dysfunctional programs.

A second set of reforms related to the introduc-tion of e-governance and e-procurement, in-cluding computerization of document registration,payrolls, pensions, and the government employeedatabase and the introduction of an Internet-based tendering system for procurement abovea designated value.

A third set of reforms related to the identificationof public enterprises for reorganization, pri -vatization, or closure; the implementation of theprogram; and the introduction of a voluntary re-tirement scheme, with provisions for retrainingand reallocation of the employees. Other mea -sures included the establishment of the Center forGood Governance in Hyderabad, with supportfrom DFID, and the introduction of Medium-term Expenditure Framework Plans for selectedgovernment departments.

Nigeria. The Bank’s major intervention at thestate level has been the 2005 State Governance andCapacity Building Project. This was originally rolledout for three states—Bauchi, Cross River, andKaduna—but a component in the 2006 LagosMetropolitan Development and Governance Proj -ect uses the same model. The model has a stan-dard package that covers all participating states.It includes public financial legislation, budgetpreparation, an accounting and reporting system,external audit, budget and treasury informationsystems, and human resource management. In ad-dition there is a state-specific component forwhich each state was asked to identify its priorityneeds. In Bauchi and Kaduna the emphasis wason revenue through the modernization of thetaxpayer identification system, while in Cross Riverthe state requested the rehabilitation of the Man-agement Development Institute. The project got

off to a very slow start, but has now begun toshow some progress. A series of targets was es-tablished for the project objectives, and there hasbeen progress toward them, though none havebeen met yet. These projects represent a verysmall and tentative first step in tackling one of Nige-ria’s most serious development issues.

Russia. In 1999, the Russian government took sig-nificant steps to reform intergovernmental fiscalrelations. An interministerial working group for in-tergovernmental fiscal reform was established, agovernment fiscal concept paper was adopted, andthe government resumed dialogue with the re-gions on key issues of intergovernmental reform.The Bank supported this process with two key op-erations: the Regional Fiscal Technical AssistanceProject (RFTAP) and the Fiscal Federalism andRegional Fiscal Reform Loan (FFRFRL).

The $30 million RFTAP was approved in Decem-ber 1999. The purpose of the project was to sup-port participating regions in a wide range ofinstitutional development programs.8 Access toRFTAP funds was determined competitively on thebasis of performance. The principles were widelyadvertised. On the basis of this competition, sixregions were selected for participation in theproject.9 Despite slow implementation, the proj-ect has produced a formidable list of achieve-ments, including enhancements in federal andregional fiscal legislation, federal monitoring ca-pacity, accounting and budgeting in the selectedregions, and the carrying out of sectoral PERs.

The objectives of the FFRFRL of 2002 were tosupport the regions in the implementation of fis-cal reform programs that promoted financialtransparency and budgetary accountability andstrengthened fiscal management policies andpractices at the regional level. This was an ad-justment loan intended to support the imple-mentation of the Regional Fiscal Reform Fund(RFRF) set up by the federal government. TheRFRF, in turn, was a window of the federal budgetto reward regions that demonstrated effectivefiscal performance and put in place fiscal reformprograms. Regions competed for this Fund bymeeting a set of specified standards.

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WORLD BANK ENGAGEMENT AT THE STATE LEVEL

Over a three-year period (2002–05), the FFRFRLmade a significant contribution to the evolutionof fiscal management at the regional level. Al-though the overall amount of the loan may seemsmall in relation to the size of the Russian econ-omy, it was leveraged by the resources of the RFRF.And, for each participating region, it representeda sizeable share of their budget and a substantialincentive to improved performance. A set of quan-titative proxy indicators of quality was establishedat the outset of the project, and the value of thesehad doubled by its completion. Among the achieve-ments at the regional level were the introductionof new procedures to control budget commit-ments, reduction in the number of off-budget ac-counts, monitoring and capping of tax exemptions,improvement of the information base and moni-toring of debt, improved asset management tech-niques, and strengthened internal audit of theuse of budget funds.

Support for Improved GovernanceIn most cases the Bank’s approach to gover-nance issues at the state level appears to havebeen indirect, through the various aspects of im-proved public expenditure management de-scribed earlier. The Bank has used InvestmentClimate Assessments at the state level in somecountries to identify bureaucratic and, by impli-cation, governance obstacles to private sectordevelopment. In Brazil, the Minas Gerais Devel-

opment Policy Loan (MGDPL) hadcomponents for simplifying the taxregime for small and medium-size en-terprises, creation of a one-stop shop,streamlining the environmental li-censing procedure, and promotion ofpublic-private partnerships.

Perhaps the most interesting operation of thistype is the support the Bank provided to St.Peters burg in 2003 for an Economic Develop-ment Project that included reform of the businesslicensing regime, divestment of city-owned en-terprises, reform and increased transparency ofprocurement procedures, and adoption of zon-ing legislation. This model of providing supportto a state government that shows genuine com-mitment to tackling corruption and improvinggovernance through institutional developmentand state legislation could be an important ele-ment of Bank operational engagement at thestate level in the future.

On balance, the efforts of the Bank tosupport fiscal reform have yielded pos-itive returns in all four countries ex-amined by the study (box 3.4). Thetraction that Bank funding provided for fiscal reform at the state level wasclear in all cases. While at the federallevel the amounts of funding the Bank

THE SCOPE OF BANK ENGAGEMENT

3 3

In some cases, fiscalreform is closely relatedto improved governance;in general, however, theBank’s approach to state-level governance issueshas been indirect.

The Bank’s efforts insupport of fiscal reformsat the state level haveresulted in positivereforms in all fourcountries.

In Orissa, a contributory factor to the state’s fiscal problems until2000 was the lack of transparency about the seriousness of theproblem. The government preferred to maintain silence about the fiscal problems, and instead to publicize such achievementsas the size of the approved (but not implemented) annual plans.

The Bank’s involvement helped to illuminate the seriousness ofthe problem. An unpublished Bank report on fiscal reform and eco-nomic growth in Orissa cited the importance of issuing a WhitePaper as the first requirement of launching the reform program.This contributed to the decision of the state government to preparean issues paper on the state’s finances.

But more than any specific action or condition, the general perception is that the Bank’s involvement and focus on these is-sues contributed to the changes that took place. The current sit-uation is now almost the reverse of the previous situation, and stategovernment and officials now take pride in the openness of the Budget-at-a-Glance document and the disclosures on the Internet.

A lesson from this experience is the importance of sustainedand continuous engagement with the state government on theseissues.

Box 3.4: Improved Governance in the Fiscal Area in Orissa

Sources: IEG consultant report and mission interviews.

can provide are relatively small for these largecountries, at the state level they represent real fi-nancial additionality.

In all the countries the Bank’s role as an honestbroker in providing incentives and support forstate governments to participate in the federal fis-cal reform agenda was significant, and all the staterepresentatives interviewed appreciated the ex-ternalities of a direct dialogue with the Bank andthe sense that the Bank was committed to, andinterested in, their success.

When one moves to outcomes of Bank engage-ment in fiscal reform, measurement and attribu-tion become difficult. As indicated for all thecountries concerned, 2000 to 2007 were years ofgrowth with improving finances at all levels ofgovernment. The Bank selected states where thegovernment had shown commitment and alreadystarted to move in the proposed direction. Inevery case where the state followed through to thepoint of borrowing from the Bank, there is evi-dence of improved fiscal management. In somecases (Russia and Brazil) the improvements wentbeyond Bank projections. In India, improvementwent beyond expectations in Orissa and was per-haps in line elsewhere, and in Nigeria it fell short,but with forward momentum.

Multisector Engagement at the State Level In addition to the specific focus on fiscal reform(discussed in the previous section), another aspectof the Bank’s engagement with states in the pastdecade has been to take a holistic view of devel-

opment at the state level—in essencetreating the state as a country—anddeveloping a strategic approach to supporting poverty reduction at thestate level. The entry point for thisbroad engagement has generally beena state government commitment to fiscal reform, evidenced either throughits record over the years (as in Ceará in Brazil or Karnataka in India) orthrough specific agreements with theBank as part of a multisector lendingoperation, designed to restore fiscal

stability (Andhra Pradesh in India or Minas Geraisin Brazil).

In some cases the Bank has labeled these re-forming states “focus” or “lead” states, with theimplication that it would design a package of in-terventions intended to support the develop-ment effort. The two cases that were most fullyworked through are the states of Ceará in Braziland Andhra Pradesh in India. In both states theBank program combined investment lending inmost of the core economic and social sectorswith multisector lending. The objective was to de-rive synergies from the combination of activities.In Andhra Pradesh, for example, the Bank was ex-plicit in its view that the difficult measures re-quired for fiscal reform needed to be matched byincreased investment in agriculture, rural devel-opment, health, and education to provide a po-litically acceptable package of reforms.

It is noteworthy that the states in which the Bankhad a broad strategic engagement were generallynot the poorest. Instead, the Bank has spent agreat deal of time in these countries supportingrelatively high-income, high-capacity states (MinasGerais, St. Petersburg, Karnataka). While this sup-port has added value, it has come at the expenseof Bank efforts in poorer states that lack capacity.The selection of states for broader engagementoften focused more on the fiscal reform crite-rion than on the broader poverty issue. The stateof Alagoas in Brazil is a good example. The re-forming government of the state is saddled witha large debt overhang from past administrationsand lacks the fiscal space, required by the federalFRL for external borrowing. The Bank, with thesupport of the federal government, is ready to pro-vide assistance to Alagoas, but making an excep-tion in this case might put at risk the disciplinethat the Brazilian authorities have worked so hardto achieve.

On the whole, however, the fiscal entry point hasbeen a good proxy for the commitment of thestate government to development and poverty re-duction. For example, when the Bank initially at-tempted to work with Orissa, one of India’s poorerstates, the poor quality of fiscal management did

3 4

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

In several states the Bankhas developed a broad

strategic approach topoverty reduction,

designating such states“lead” or “focus” states.

But these states weregenerally not the poorest

in their countries.

not allow for adjustment lending and broad en-gagement. The Bank worked patiently with the au-thorities until there was evidence of progress infiscal reform, and then moved rapidly to providea wide-ranging support program.

The Bank’s broad strategy of state-level inter-ventions generally enjoyed the approval of moststakeholders. It was closely coordinated with andendorsed by the federal government—or rather,followed the federal policy. The specific contri-bution of the Bank was in identifying specificmeasures to implement this strategy, prioritizingvarious components, and adjusting modalities tosuit individual states. The state governments,often feeling somewhat constrained in imple-menting reforms by political factors, realized thatBank engagement provided a way of reducingthe political risks of supporting reform.10

State-Level StrategiesMany of the states with which the Bankis working closely are larger than mostof the Bank’s borrowing member coun-tries. The Bank’s lending programs in Ceará,Minas Gerais, Andhra Pradesh, Orissa, and Lagosare far larger than overall lending in many coun-tries. Yet these programs have proceeded with-out the preparation of strategy documents.

The overall state strategy is discussed in CAS doc-uments, but there is no room for outlining indi-vidual state-level strategies. To do this would clearlyadd considerably to the work program, but thereare a number of factors that argue for periodicpreparation of brief state strategies for the three-to-five states in each country where the Bank hasor is likely to have a major engagement. This islikely to help on several fronts. First, there is the

THE SCOPE OF BANK ENGAGEMENT

3 5

Andhra Pradesh is considered a middle-income state in India. Inthe late 1990s, Andhra Pradesh became one of the first Indianstates to promote reform and fiscal adjustment and to reach outfor Bank assistance. At the time, the Bank’s strategy in India wasto target the reforming states. Andhra Pradesh was selected asthe initial focus state. The culmination of the Bank- Andhra Pradeshpartnership was the Andhra Pradesh Economic RestructuringProj ect (APERP, 1998), a massive multisectoral loan underpinnedby an agreed multiyear fiscal framework with a total loan/creditvalue of $540 million. This was essentially a DPL that had to be con-structed as an investment loan, since Bank policy did not approveof subnational DPLs at that time.

After Bank policy on subnational DPLs changed, AndhraPradesh received three DPLs (fiscal 2002, 2004, and 2007). TheBank’s first state-level policy-based loan (S-PBL) to AndhraPradesh addressed not only the need for fiscal adjustment, but alsopublic expenditure management reform and restructuring of pub-lic enterprises, including privatization. The later DPLs added threespecific sectoral foci: power, health, and education. The Bank’sS-PBL program was controversial in India because it censoredsome populist measures such as free power and irrigation waterfor farmers. Despite the initial setback in the power and irrigationsectors, the S-PBLs not only ushered in fiscal correction but also

helped Andhra Pradesh to become the frontrunner in a numberof reform areas, with significant demonstration effect on otherstates: introducing a single-window clearance system for new in-vestments, e-procurement on a wide scale, and so on.

Andhra Pradesh also implemented a number of investmentprojects (in the rural poverty, forestry, water, and power sectors)over fiscal 1998–2008. The Bank has also supported significant non-lending activities in Andhra Pradesh. It started with the “AndhraPradesh: Agenda for Economic Reforms“ (World Bank 1997) report,which underpinned the subsequent lending program. In additionthere have been several Andhra Pradesh Policy Notes coveringissues such as fiscal and debt management and analysis of itsgrowth potential and public enterprise reform.

The portfolio of Andhra Pradesh has changed with the Bank’sshift in strategy away from focus states to lagging states. WhileBank’s commitments to Andhra Pradesh had reached $1.5 billionby 2000, after the strategy shift in fiscal 2004, the Andhra Pradeshportfolio gradually fell. In June 2004 it comprised 10 percent of thetotal lending volume ($1.2 billion) and fell to 5 percent ($0.74 billion)in June 2008. At the time of the 2008 CAS, only one project plannedfor the state was considered firm (Andhra Pradesh Water SectorImprovement).

Box 3.5: The Bank Program in Andhra Pradesh

Sources: World Bank documents and mission interviews.

The Bank’s strategy hadthe approval of moststakeholders.

matter of ownership of the program. Itis easier to secure a clear public com-mitment to the approach, as well asbringing on board nongovernmentalorganizations (NGOs) and civil society,if the Bank can use a strategy docu-ment as the basis for a broad dialogue.Second, in most states and regions theBank is not the only donor, and strat-egy documents could be useful for

donor coordination. Third, this exercise wouldhelp to identify gaps in the knowledge frameworkat the state level and for the Bank and the state gov-ernment to plan follow-up analytic work and bet-ter integrate it into the lending strategy.

In several cases, either the Bank or the concernedstate government did try to put forward addi-tional state-specific strategy documents. But these

efforts did not cover all states in whichthe Bank had major engagements, and they were not pursued in a con-sistent manner, despite an enthusiasticreception at the state level.11 In Nige-ria, in the initial period of Bank re-engagement (2000–03), Lagos prepared

an economic blueprint (Lagos Ten-Point Agenda)with poverty alleviation and job creation as the central themes. Later (since 2004), all state gov-ernments in Nigeria developed comprehensive de-velopment strategies—SEEDS.

The Bank’s CPS later built on the Lagos strategyand SEEDS and focused on improved governance,private sector–led growth, and human develop-ment at the state level. A promising approach to establishing partnership relations with regionsin Russia are the memoranda of cooperation,signed with a few regions (Khanti-Mansiisk,Tatarstan, and Voronezh). In order to become asignatory to such a memorandum, a region shouldhave a record of cooperation with the Bank. InBrazil, the Bank prepared state economic mem-orandums for a few states in the late 1990s, butthis effort was not pursued in all states. In India,in addition to a number of high-quality state eco-nomic reports, (for example, World Bank 1997,which underpinned the subsequent lending pro-gram), several informal state strategies have beenprepared and discussed with the authorities, butthey were never formalized and/or spread toother states.

3 6

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

Although some of thestates the Bank has

worked with are largerthan most of its

borrowing countries, itsprograms in those stateshave not benefited from

fully articulatedstrategies.

Where there were state-specific strategy

documents, they did notcover all the states with

which the Bank wasengaged.

Chapter 4

• Finding the right lending instrumentfor states was an early challenge.

• In most cases, multisector lendingproved most effective for gettingfunding to the right areas at the statelevel.

• The fee-for-service approach alsooffers promise, but it is relatively new.

• The Bank’s implementation arrange-ments were adequate, though therewere concerns about the length andspeed of the Bank’s processes.

• The Bank’s analytic work and tech-nical assistance at the state levelhave been timely and competent, butit has not been considered a strate-gic part of the Bank’s state-level engagement.

• The Bank has generally partneredeffectively with other donors at thestate level.

Road work in Brazil. Photo by Thomas Sennett, courtesy of the World Bank Photo Library.

3 9

Modalities of State-Level Engagement

Evolution of InstrumentsThe multisector restructuring loan in AndhraPradesh, an investment loan undertaken in 1998,was a way of squaring the circle, but it was an enor-mously costly operation to prepare and supervise.With the adoption of the policy to allow for ad-justment lending at the state level, the Bank wasmuch better placed to conduct a policy dialoguewith the state governments and to focus on someof the key policy constraints, such as governance,the investment climate, and the quality of publicexpenditure management.

Adjustment lending rapidly became the instru-ment of choice to support fiscal reform andstatewide strategies in Brazil and India. In Brazil,however, there was a sense that adjustment lend-ing was not as effective in reaching out to the line ministries in key sectors. The Brazil countryteam developed the innovative Multisector SWAp(see box 4.1), a results-based instrument withtarget indicators defined for each sector and dis-bursements associated with achievement of thetargets.

Multisector lending has proved an indispensablecomponent for drawing the core ministries—finance and planning—and the line ministriesinto a dialogue on development priorities. It

also brought to the forefront the intersectoral linkages required toachieve results, such as the need forimproved water supply to reduce in-fant mortality.

Another important innovation has been the pio-neering of reimbursable technical assistance (feefor service) at the regional level in Russia. Bankbudgets rarely allow the level of analytic workdemanded by intensive engagement in three-to-five states, and an approach that permits states topay for additional work has considerable prom-ise for other middle-income countries.

As a result of these new developments, state gov-ernments recognized that they had an inde-pendent role in promoting policy reforms andfinancial execution, in addition to their normal re-sponsibility for project execution. In Brazil, StateReform Loans (de facto DPLs) for thestates of Mato Grosso, Rio Grande doSul, and Rio de Janeiro (1997–98) in-cluded considerable policy compo-nents on fiscal adjustment (cuts in staffand salary of civil servants, pensionand tax reforms) and structural reform.This new trend better responded tostates’ own investment and reform

The issue of how to engage has also been a challenge for the Bank, andthere has been considerable evolution in the approach. The first chal-lenge was the use of adjustment lending at the state level. The first such

adjustment loan was made to Uttar Pradesh, India, in 2000. Until that pointthe Bank had struggled to find an instrument to attach to its policy dialogueand strategic approach at the state level.

Adjustment lendingquickly became thepreferred instrument atthe state level.

Multisectoral lendinghelped to attract theattention of the rightministries, and in Nigeria it helpedovercome federalauthorities’ concernsabout loss of control.

plans, thus strengthening their sense ownershipand commitment and improving capacity.

The only country among the four that receivedonly investment loans (on IDA terms) was Nige-ria. Proposed adjustment lending (World BankGroup 2000) never materialized because of con-cerns about macroeconomic stability and the gov-

ernment’s commitment to reform. There has beenno such proposal since then. Federal authoritieshave been skeptical about the use of DPLs in Nige-ria, including at the state level, and have expressedconcerns about possible loss of control over thepublic finance system. At the same time, somestate-level counterparts have expressed interest instate-level DPLs or multisector SWAps.

4 0

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

SWAps traditionally have been associated with a single sector. Fromthis perspective, the SWAps in Brazil are innovative because theywere adapted to integrate several sectors and they were deliveredat the state level.a

Ceará was the first state to implement a multisector SWAp.b

This loan aimed to strengthen social inclusion while preserving fis-cal sustainability. It had a unique design, because it was an Adapt-able Program Loan making use of a results-based SWAp loanmodality.

The key innovative features of this loan were:

• Multisectoral Model and Activities. The loan had two compo-nents. The SWAp component supported nine eligible expendi-ture programs across five key line sectors: health, education,water and sanitation, water source management, and environ-ment. The technical assistance component primarily supportedpublic sector management. Targeting six sectors assured thatinstitutional reform synergies would take place across sectors.

• Results-Based Disbursement. The project emphasized the useof results-based disbursement. Disbursement depended on thefollowing: (a) the borrower had reached specific disbursement-linked indicators mapped to each sector; (b) the borrowers’ pri-mary surplus was above a certain threshold; (c) performance ofCeará on three other World Bank loans (water, education, andrural development), ensuring that these loans met stated phys-ical as well as disbursement targets; and (d) the borrower hadactually spent at least 70 percent of the amount budgeted for thespecific sectors.

• Disbursement to Treasury and Not to Sectors. The Bank re-leased its funds directly to the state treasury as a single tranchefor reimbursement of expenditures under the various programs.

It allowed the government to manage its fiscal resources and al-locations while forging a partnership between the central andthe line secretaries.

This loan had varying degrees of success in achieving the desiredoutcomes in the targeted sectors. It was very successful in lever-aging the Bank’s support to ensure that sector expenditure levels,which had been about 28 percent of budgeted amounts before thestart of the project, were up to 70 percent. The loan also helpedto reinforce other traditional investment projects. Two of the threeinvestment loans in Ceará were upgraded to satisfactory as a re-sult of cross-conditionality. The downside of the modality of thisloan is that it is complex and it can be successfully implementedonly if there is sufficient institutional capacity.c

Multisector SWAps in Other Brazilian States: The Ceará SWApmodel was sufficiently successful that a second SWAp was ap-proved ($240 million, 2008). The model is also being replicated inMinas Gerais ($976 million, 2008), the Federal District ($130 million,2009), and Pernambuco ($155 million, 2009). Each of these opera-tions follows essentially the same SWAp structure, combiningsupport to public sector management reforms with support for selected sector programs. In addition, each one links disbursementsto the borrower’s ability to meet specific performance targets overthe course of the loan. The nature of the indicators varies in ac-cordance with the institutional development of the state/sector. For example, the Minas Gerais SWAp relies to a greater degreethan the others on outcome measures: appropriate “stretch goals” for one of Brazil’s most developed states. In contrast, CearáSWAp-II will use mainly output measures rather than outcome tar-gets as disbursement indicators for the sector programs.

Box 4.1: Multisector SWAp

Sources: World Bank documents and IEG mission materials.a. Before Brazil, only Mexico had implemented a multisector SWAp (fiscal 2004), but it was at the federal level.b. Ceará Multi-Sector Social Inclusion Development Project ($150 million, fiscal 2006).c. Despite being a poor state, Ceará was considered to be relatively well managed and reform minded, making it a viable candidate for implementing the SWAp.

Multisector SWAps and State-Level DPLs In Brazil the pioneer states in piloting the new in-struments were Ceará and Minas Gerais. TheCeará multisector Social Inclusion DevelopmentProject (SWAp) was developed in response to thesevere fiscal constraints faced by the state,1 whichthreatened key public investment programs anddelivery of core public services. The implicit cri-teria for selecting Ceará for this initiative werepoverty, environmental challenges, fiscal sus-tainability concerns, and the strong commitmentof state leadership to modernization and reform.

A slightly different situation led to developmentof the Minas Gerais2 Partnership for Develop-ment DPL. In 2003, after a period of suspension

of credit operations, the newly elected state gov-ernment approached the federal government andthe Bank for support of its program to turn aroundthe inherited negative economic and financialtrends and to put the state back on a sustainablefiscal path. The project was designed to put inplace the state’s overall budget constraints and tobring Minas Gerais back in line with the nationalstabilization program. More important, it adoptedthe state government’s choque de gestão (man-agement shock) approach (box 4.2) to reforms.

Apart from laying the foundations for improvedpublic sector management, the project helped thestate to complete a fiscal turnaround and en-abled the government to regain its investment

MODALITIES OF STATE-LEVEL ENGAGEMENT

4 1

After years of economic mismanagement, the budget of MinasGerais reached a deficit of R$2.3 billion (about $1 billion) in 2003.Public investment dropped from an average of R$5 billion/year(2003 prices) in 1995–98 to R$1.5 billion by 2003. The net consoli-dated debt of the state amounted to 238.87 percent of the net cur-rent revenue in 2003. Because of its indebtedness, the state couldnot count on financial support from the federal government tocontract credit operations (this was prohibited by law).

Faced with extremely adverse fiscal conditions, the newlyelected state government initiated a set of bold adjustment mea -sures, the so-called choque de gestão (management shock), in Jan-uary 2003. This management shock can be divided into two stages:fiscal balance and fiscal quality.

First Phase (2003–06) The first set of measures concentrated on traditional policies: re-gaining fiscal sustainability by increasing revenue and rationaliz-ing expenditures; reorganizing the state government’s macrostructure (administrative reform); integrating planning and man-agement instruments; and establishing a new human resources policy—for example, creating a ceiling for remuneration.

The innovative feature was the creation of the Strategic Re-source and Action Management. GERAES, as it was known, wasthe operational framework that guided the allocation of resourcesto structural projects. In 2005, the government defined and agreedon performance goals for all 31 of the state’s structural projects.

These data were entered in the central project monitoring sys-tem for regular monitoring of their performance, which enabledthe government to limit wasteful expenditures. The combinationof the traditional policies with the impact of GERAES turned thefiscal situation around. Starting in 2004, the state had four con-secutive years of fiscal surplus, after one entire decade of fiscaldeficit.

Second Phase (2007–to date) Taking advantage of the improvement in public accounts, the Second Phase was launched in 2007, under the label of Results-Oriented State. This meant that fiscal balance would be a prereq-uisite for government action, and government performance wouldbe measured by improving outcomes; that is, it had to be results-oriented. To move toward achieving this goal, the governor ofMinas Gerais asked for the Bank’s support. The Bank respondedwith a two-tranche DPL of $170 million, which was fully disbursedin May 2007. This DPL had three pillars—fiscal stabilization, public sector reform, and private sector development. All three pil-lars had a well-defined action matrix and impact indicators. Ithelped the government to formulate its actions so that it would beresults-oriented.

To continue with his program, in July 2008 the governor ofMinas Gerais asked the Bank for a loan of $1 billion (the entire bor-rowing capacity of the state in its agreement with the federaltreasury).

Box 4.2: Minas Gerais—From Management Shock to Results-Oriented State

Sources: Government of Minas Gerais; IEG mission materials and interviews.

capacity. Overall, besides their obvi-ous contributions to macroeconomicstability, a sustainable fiscal situation,and improved performance of other in-vestment loans, the Ceará SWAp andMinas Gerais DPL were instrumental in introducing and institutionalizingthe culture of results-based manage-ment at the state level and strength-ening coordination within the stategovernment.

In Russia the only two regional DPLs were im-plemented in the cities of St. Petersburg3 andKazan.4 Both projects were designed to supportthe implementation of the federal government’sMedium-Term Program of Social and EconomicDevelopment for 2002–04 by ensuring conform-ity of federal and regional legislation and by in-troducing clear functional divisions of authorityand financial resources between the federal andregional levels. Both loans were designed as sub-national DPLs, with disbursement tied to progressin the implementation of reform under specifiedterms and conditions.

The objectives of the St. Petersburg DPL includedimproving the business climate, stimulating ex-pansion of private sector participation and pro-moting development of the land and real estatemarkets, and strengthening the city’s fiscal man-agement and ensuring the long-term stability ofits fiscal revenue base. The “city component” wasclosed under somewhat unusual circumstances:despite meeting all loan conditions, the City of St. Petersburg declined both tranches and re-quested reallocation of the first tranche to the “fed-eral component” and cancellation of the secondone. The formal reason given was that a contin-uous budget surplus (2004–06) made the Bank re-sources redundant.

Unlike St. Petersburg, Kazan had not been an independent subnational entity, but an adminis -

trative unit within the Republic ofTatarstan,5 and obtained the status ofa municipal formation only in 2004(after loan approval), which enabled it

by federal law to carry out policy and institutionalreforms. Originally the loan was contemplatedas an investment operation, but given the timeconstraints,6 it was transformed into a DPL. Therewas considerable skepticism in the Bank regard-ing the feasibility of reforming Kazan’s financialmanagement system. Some viewed the loan as apolitical order from the central government. Nev-ertheless, the importance of engaging an impor-tant region within an important client countryoverweighed the risks. In hindsight, the Bank’s de-cision to proceed with the loan was rewardedwith successful implementation and satisfactoryoutcomes,7 and it serves as an example of a closeand productive partnership with the client at thelocal level.

Despite the overall success of both regional DPLsin Russia, they are unlikely to be replicated. First,the financial approach of the Kazan project, withloan proceeds provided to the city on a grantbasis, is unlikely to be repeated in other munici-palities. Second, the City of St. Petersburg ac-complished the needed reforms “for free,” withno incentive other than its own good will. It isworth noting, however, that regional counter-parts in both cases admitted that the key value ofthe loans was not the monetary incentive, butthe authorities’ understanding of the usefulnessof fulfilling the loan conditions—together with theacquired capacity and skills. With hindsight, theprojects could have been even more successfulhad they been supplemented with sizeable tech-nical assistance for implementation of conditions.In the absence of a technical assistance compo-nent, such assistance was limited to what couldbe provided by the Bank staff in the course ofpreparing and supervising the loan.

Investment Lending at the State LevelInvestment operations in all four countries com-prised the bulk of the Bank’s lending. The Bank’smethod of operation did not differ greatly fromits practices in a regular investment operation atthe federal level, or in a country of a size compa-rable to a state in a federation. The main value wasprobably the greater chance of adopting lessonsand using the model of a successful state-level in-

4 2

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

The Ceará SWAp andMinas Gerais DPL not

only contributed tomacroeconomic

stability, but also wereinstrumental in

introducing andinstitutionalizing

the culture of results-based management

at the state level.

The Russia DPLs, thoughsuccessful, are unlikely

to be replicated.

vestment project in a similar state within the samefederation, compared with country-to-countryexchange of experience.

Among examples of such success is the Basic Ed-ucation Quality Improvement Project in MinasGerais (Brazil). This project helped the state gov-ernment to create an enabling policy environ-ment to increase school productivity throughprogressive reform measures aimed at process im-provements and decentralization. The culture ofmonitoring and evaluation introduced to the sec-tor by the project made it easier for the state todevelop an appropriate set of education indica-tors for the later SWAp operation. The MinasGerais education program is currently viewed byother states as a potential model that can be ap-plied elsewhere.

Most of the Bank’s investment loans at the statelevel supported infrastructure development. InCeará (Brazil), the Bank provided support for anirrigation program that is credited with a major en-hancement in the state’s economic prospects. InNigeria, with its much smaller states, infrastruc-ture has been a difficult area for the Bank: a watersupply project covering six state capitals provedextremely difficult to implement and had limitedimpact. In Nigeria’s larger states, the Bank hasbeen able to intervene more effectively in infra-structure, and the Lagos Metropolitan TransportProject is one of the success stories of the Bank’sprogram there.

Capacity Building and AAA Overall, the Bank’s analytical work and technicalassistance at the state level were widely appreci-ated and regarded as timely and competent inputsin building capacity. At the same time, there is anappetite for more, deeper, and more state-specificeconomic and sector work (ESW) and technicalassistance, as well as room for improving client par-ticipation and strengthening the link betweenthe analytical work and lending.

The Bank’s analytic work at the state level has fo-cused mainly on fiscal issues. There has been rel-atively little other state-specific sector or thematic

analysis. In the mid-1990s the Bank un-dertook a series of state economicmemoranda in Brazil that were muchappreciated by the state authorities.In most cases these were collaborativeefforts, and the outputs were viewed asjoint products. For reasons that are un-clear, the Bank has not followed up onthis model, either in Brazil or in othercountries.

Analytic work does not appear to havebeen considered a strategic part of theBank’s state-level interventions—therewas no organized attempt to identifykey knowledge gaps and to developpartnerships with state institutions tomeet these gaps. In some cases, stud-ies have been carried out, but have notbeen made publicly available. Giventhe paucity of analysis and informationat the state level in many countries,this is an obvious gap to be filled by theBank.

In general, wherever the Bank’s analytic workpreceded the projects in states, it clearly con-tributed to bridging the knowledge gap and to im-proving program design. In Russia, the Bank’swork on intergovernmental financial relations(World Bank 1994; Le Houerou 1995; Le Houerouand Rutkowski 1996; Freinkman, Treisman, andTitov 1999; Freinkman and Yossifov 1999) provideda foundation for a future comprehensive pro-gram of reform and restructuring (see box 3.3).In Nigeria, the Bank had an intense AAA program,albeit mainly at the federal level (only 8 ESWproducts out of 75 focused on the state level),which facilitated modernization of the tax sys-tem, adoption of the Medium-Term ExpenditureFramework, and the design of the FRL at the statelevel. In India,8 the Bank’s programs in Orissaand Andhra Pradesh to some extent owed theirsuccess to the high quality of analytical and di-agnostic work preceding such engagements.

To improve the link with local demand, the Bankmight want to consider formally eliciting stake-

MODALITIES OF STATE-LEVEL ENGAGEMENT

4 3

Much of the Bank’sinvestment lending tostates was forinfrastructure andoperated in much thesame way as operationsin small-countryborrowers.

The Bank’s analyticalwork and technicalassistance—focusedmainly on fiscal issues—were timely, competent,and widely appreciated.

Analytic work was notconsidered a strategicpart of the Bank’s state-level interventions.

holder views on suitable subjects for AAA. Knowl-edge of international best practices, a clear com-parative advantage of the Bank, needs to bebrought into analytical work to a greater extent.

Technical assistance associated with Bank loansis often seen by the state-level clients as a primaryadvantage of borrowing from the Bank, as op-posed to other lenders (especially in middle-income countries such as Brazil and Russia). However, despite a declared focus on capacitybuilding, the Bank rarely tested state-specific

technical assistance loans, althoughsome loans did include a componentfor technical assistance and/or train-ing. Russia is the only country amongthe four included in this review where

reimbursable technical assistance (or fee-for-service) is being implemented. It includes prepa-ration of regional strategies, sector analyses, andtechnical support for specific investment activi-ties (for example, public-private partnerships ininfrastructure).

Growing demand for this new instrument can beseen in the regions, in part because of the fiscal

federalism loans (RFTAP and FFRFRL,discussed earlier) that were instru-mental in demonstrating the high qual-ity of Bank’s technical assistance to theregional administrations. The City of St. Petersburg used the Bank’s paid advi-

sory services to help develop public-private part-nership arrangements in four investment proj-ects. There are similar requests from a number ofother regions (Khanti-Mansiisk Okrug, ChuvashRepublic, Volgograd Oblast, and others).9 It isnoteworthy that reimbursable technical assis-tance (fee-for-service) arrangements implementedat the regional level in Russia, which were quitepopular with both central and state authorities,have yet to be tested in other countries, despiteseemingly fertile ground for this modality of co-operation, most notably in Brazil.

Implementation Arrangements and Staffing In most cases, the Bank followed standard pro-cedures for implementing its projects at the statelevel—which are quite similar to those used in fed-eral projects, with rare exceptions. At the sametime, there were several good practice examplesthat deserve mention. In Brazil, the partner agencyfor Ceará SWAp was the parastatal Economic Re-search and Strategy Institute, which set up a proj-ect implementation unit staffed by regular stateemployees. This decision proved important forsmooth implementation of the project. The Bankand government counterparts identified and mon-itored disbursement-linked indicators, with di-rect involvement of central and line secretariats.This arrangement improved the interagency co-operation among line secretariats, because achieve-ment of many indicators required joint efforts.

4 4

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

Borrowers often see the Bank’s technical

assistance as a majorbenefit of borrowing.

The Bank’simplementation

arrangements weresimilar to those it used at

the federal level.

Table 4.1: Average Preparation and Supervision Costs of State- and Federal-LevelProjects, Fiscal 1998–2008

Preparation cost Supervision cost Total costCountry (US$ ’000) (US$ ’000) (US$ ’000)

Brazil Federal 237.7 360.1 597.8State 283.9 407.6 691.5

India Federal 421.8 563.2 985.0State 517.6 622.5 1,140.1

Nigeria Federal 469.4 840.9 1,292.9State (designed to roll out to all states) 650.3 853.4 1,503.7State (tailored for individual states) 944.5 804.6 1,749.1

Russia Federal 773.6 703.4 1,477.0Region 952.8 552.4 1,505.2

Source: World Bank data, April 4, 2009.

One concern surfaced consistently in conversationswith state authorities in all countries (although itis not necessarily specific to the state level only):the lengthy process and slow pace of projectpreparation and implementation, which was oftenblamed on the Bank’s procurement and dis-bursement procedures. Creation of parallel struc-tures for project management was also mentionedas an impediment to more effective use of theBank’s loans to strengthen institutional capacity atthe state level (Nigeria). The issue of the pacingof project preparation is well recognized by Bankmanagement, and most operational staff in all

four countries are now located in thefield. The drive to hire native speakersand train expatriate staff in the languagespoken in the country (especially inBrazil and Russia) was highly effectiveand appreciated by the authorities.

Staff resources allocated by the Bank for state-level projects seem adequate. Unlike some de-velopment partners, the Bank did not pursueestablishment of field offices in any of the states—regardless of engagement intensity or geographicremoteness (for example, Ceará in Brazil, Andhra

MODALITIES OF STATE-LEVEL ENGAGEMENT

4 5

Bihar is India’s third-most populous state and one of its poorest.About 41.4 percent of the state’s population lives in poverty com-pared with 27.5 percent for India as a whole. Average state percapita income is about a quarter of the all-India level. Bihar’s so-cial indicators are among the lowest in the Indian states, and if pres-ent trends continue, it will attain only two of the eight MDG targetsby 2015 (reduction in child malnutrition and access to safe drink-ing water).

Bihar was a nonperforming state with limited Bank engagement.Between fiscal 1998 and 2004, Bihar received support throughtwo projects—one for district primary education and the other forstrengthening immunization through a national program.

The 2004 India CAS proposed a strategy for stronger engage-ment with lagging states, which paved the way for greater resourceallocation to Bihar. This change in Bank strategy almost coincidedwith the November 2005 election of a new coalition and politicalleadership strongly committed to a developmental agenda.

The Bank initiated engagement in Bihar by delivering a reportentitled “Bihar: Towards a Development Strategy” (World Bank2005a). This document presented a basic development strategy thatrested on two pillars: enhancing Bihar’s growth performance byestablishing a healthy investment climate and supporting basichuman resource development through improved quality in basicsocial services.

With a strategy in hand, Bank lending to Bihar began to de-velop more strongly, which led to the approval of the first BiharDPL ($225 million, fiscal 2008), an investment project (Bihar RuralLivelihood Project fiscal 2007, $63 million), and technical assis-

tance ($5 million through a DFID-financed trust fund, comple-mentary to the DPL). The approval of the DPL was especiallysignificant because it accounted for over 20 percent of the state’sown revenues.

Several national projects supported by the Bank are currentlybeing implemented in Bihar, including one-third of the Bank’s Lucknow-Muzaffarpur Highway Project ($620 million). Altogether,Bihar’s share in the Bank’s net total commitments is currently 6 per-cent. Looking ahead, the Bank is developing its strategy to inten-sify and scale up its engagement with Bihar. Projects currently inpreparation may include rural roads, local governance, and de-velopment policy lending to support reforms. Future lending will de-pend on both the pace of reforms and the state’s absorptivecapacity.

Bank engagement in Bihar has taken place with significantdonor collaboration. In November 2006, the Bank, DFID, the ADB,and the government of Japan agreed to pilot a strategic partner-ship between donors in Bihar. Since then, the ADB, DFID, and theBank have developed a joint strategy for Bihar that was presentedto the Bihar chief minister in February 2008.

This partnership has enabled the donors to better serve theclient through reduced transactions costs and to offer the best pos-sible package of support to Bihar based on a rational division oflabor and innovative partnership efforts. For example, the DFID-World Bank trust fund has played an important role in supportingcapacity building. An often-cited example of the work supportedby DFID trust funds in Bihar is the development of a ManagementInformation System to track flooding in some districts in Bihar.

Box 4.3: Bank Engagement in Bihar: An Example of Effective Partnership

Sources: World Bank documents and mission interviews.

State authorities oftencomplained of the lengthand pace of preparationand implementation.

Pradesh in India, or the Far East region in Russia).Nevertheless, that did not seem to be an imped-iment, nor was it mentioned as such by the local(state) counterparts.

In all four countries, country management usedan informal system of designating state/regionalcoordinators—staff members who would serve asfocal points for information in a region, as well asthose in charge of maintaining instant contactwith counterparts. This arrangement also provedto be particularly effective in Brazil and useful, byall accounts, though not of major importance, inthe other countries. The authority of these co-ordinators was largely moral authority; they lackedspecific portfolio or budget oversight responsibilityor accountability.

Partnership10

The Bank has generally partnered effectively withother donors at the state level. In Brazil, the major

partner is the IDB. A division of laborhas emerged between the two institu-tions whereby the IDB works mainlywith municipal governments and theBank works with state governments.In Nigeria the Bank and DFID have aformal partnership and prepared a jointCAS in 2004. In India, DFID often com-plements the Bank’s loans with grantsfor technical assistance. The recentlyadopted modality of multidonor strate-gic engagement in the state of Bihar in

India presents an interesting case of potentially ef-fective and efficient joint effort of several donorsat the state level11 in a poor lagging state (box 4.3).Also in India, the Bank has jointly worked with theAsian Development Bank (ADB) in coordinatingselected projects in infrastructure.12

The Bank’s strategy in all the countries normallyinvolved a tripartite arrangement between thefederal government, the Bank (in some cases inpartnership with other donors), and state gov-ernments. The participation level of other partieswas uneven: in Brazil and Nigeria, for example, thenongovernmental sector played only a marginalrole in the design of engagement strategy, whilein Russia several NGOs and private think tankstook part in developing regional strategies.

The same can be said about the degree of in-volvement of state authorities, which varied widelyfrom one country to another, as well as from stateto state within the same country. In India, theAndhra Pradesh state government started the re-form process, while in Orissa it was the Bank thatplayed the role of initiator until a more commit-ted chief minister took office. In Nigeria, input fromthe states at the preparation stage varied fromstates that actually initiated the project (Kaduna)and actively participated in the design process(Kano and Kwara) to quite limited interest, despiteinputs from various line agencies (Lagos LMDGP).The last was a quite complicated case because ofthe unique and complex set of challenges.13

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WORLD BANK ENGAGEMENT AT THE STATE LEVEL

The Bank has partneredeffectively with other

donors at the state level,usually in a three-way

agreement including thefederal government.

The degree to which stateauthorities were involved

varied widely.

Chapter 5

Village market, Nigeria. Photo by Curt Carnemark, courtesy of the World Bank Photo Library.

4 9

Summary of Findings

In all four countries, the Bank tried to engage firstwith progressive reformist states, aiming toachieve a demonstration effect. The programs inmost selected reformer states and regions provedsuccessful and brought about many positivechanges. But there is little evidence that the in-tended demonstration effect was achieved (witha few small-scale exceptions) on the scale desiredby the Bank. Nonetheless, the Bank’s engage-ment in some of the poorer, lagging states (suchas Orissa, and, more recently, Bihar) shows thatit is possible to achieve results through persistentwork with state-level counterparts and strongpartnerships with other donors.

In many states and regions the Bank’s programwas pivotal in bringing together pro-reform gov-ernment officials. It also helped to develop an ex-pert community and a pool of local consultinginstitutions that were drawn into the formula-tion and implementation of public policy (Insti-tute of Economy in Transition, Institute for UrbanEconomics, Center for Fiscal Policy, and LeontiefCenter in Russia;1 IPECE in Brazil; and the Cen-ter for Good Governance in India).

Among other specific accomplishments are the following:

• Introduction and institutionalization of a results-based management approach at the state level.

• Progress in reforming public finance manage-ment and introduction of progressive practicesof budget planning and execution (elements ofperformance budgeting, multiyear budgeting,debt and risk management, and the like).

• Improvement in local capacity to manage re-gional fiscal resources. Newly introducedtools—such as an integrated government ac-count, evaluation of tax expenditure efficiency,Public Expenditure Reviews, a subnational fis-cal sustainability tool, and independent auditof government expenditures—frequently be-came everyday practices of state governments.

Future Research AgendaThis study has demonstrated the potential forresearch into the Bank’s development experi-ence at the subnational level. Additional cross-country thematic evaluations like this one couldprovide lessons that are applicable on a widerscale. Among the themes and directions thatcould be pursued are:

• Evaluations of new modes of engagement thatare often piloted at the state level, such asmulti sector SWAps, reimbursable technical

There is little doubt that the Bank has added value at the state level. Inthe countries studied, there was a great deal of enthusiasm at both thefederal and state levels regarding the Bank’s contribution. A large

number of specific achievements are indicative: ranging from successful fis-cal reform in Orissa to effective technical assistance and capacity building inLagos, to a wide range of achievements in Ceará, and improved fiscal man-agement in St. Petersburg. IEG therefore concludes that although state-levelengagement often requires additional effort and can be resource-intensive, it is usually worth the cost.

assistance, and lending jointly with the IFCwithout sovereign guarantees.

• Looking at another set of countries (such asChina, Argentina, Mexico, and Pakistan) to pro-vide a comparison with the findings of this study.

• An in-depth study of specific sector interven-tions (such as health or education) at the sub-national level, with possible comparison withsimilar federal-level programs.

Findings Based on the cases examined by this assessment,some general findings emerge, which may behelpful in guiding the organization of future workat the state level:

On selection of states:

• The strategy to concentrate lending serviceson few states to enhance the impact of theBank’s program is the right one in principle, butselection criteria and the mode of implemen-tation could give more weight to the needs of the poorest states. The lead/focus state

approach could be rebalanced toward poor,low-capacity states that are willing to address development problems. Engagement with better-off states can still be pursued through theuse of development policy lending and reim-bursable technical assistance.

• Bank engagement with high-performing statesadded value both in strengthening the in-statecapacity and in encouraging state-to-stateknowledge transfer, albeit mainly between thehigh performers. But there is little evidence thatit had the desired demonstration effect onpoor, lagging states on the scale the Bankhoped for, or that the Bank had an exit strat-egy to permit increased focus on poorer statesover time. Nevertheless, experience shows thatit is possible to achieve results in the pooreststates through persistent work with committedstate counterparts and strong partnership withother donors.

• It is important to stay engaged, not only instates that are able to borrow from the Bank butalso in poorer states that demonstrate a gen-uine commitment to development that can be

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WORLD BANK ENGAGEMENT AT THE STATE LEVEL

Federal- and state-level clients broadly considered the Bank’sstate-level engagement useful and timely. But views differed fromcountry to country on specific aspects, such as modalities of en-gagement and mix of products.

In Brazil, for example, both federal and state authorities seemedto prefer DPLs and multisector SWAps. Among the advantages theynoted were flexibility; disbursement speed; and, most important,the role of these loans in helping to establish and institutionalizepolicy coordination in the state government.

In Nigeria, federal authorities expressed strong reservationsabout adjustment lending in general, yet a few high-level state of-ficials expressed interest in multisector SWAps, and possibly evenstate-level DPLs.

In all cases, the federal governments have the final say aboutwhether the Bank will lend to a particular state, because they ap-prove the operations and provide the sovereign guarantee re-

quired by the Bank. The states take full responsibility for the financialexecution and implementation.

In all four cases, federal governments have been supportive of the Bank’s strategy of state-level engagement. Most federal governments value the discipline associated with Bank lending tothe states. In Brazil, for example, the federal government appearsto put considerable weight on Bank lending as a mechanism forreinforcing compliance with the FRL.

In all four countries, a detailed and structured process at thefederal level for approving proposals for state borrowing is inplace.a In Brazil and Russia, the federal governments have seenborrowing by states and regions as a way of maintaining sub-stantial Bank engagement and presence in the country, despite thesizeable resource inflows and rising per capita income level of thepast decade.

Box 5.1: Client Views

Source: IEG mission interviews.a. While it would be naïve to argue that political considerations do not enter into the state selection process, in practice decisions on the eligibility of states for se-lection are dominated by technocratic considerations. In the choice of which of the eligible states to support, both governments and the Bank have generally tried toavoid the perception of bias by including both pro-government and opposition-led states.

supported through analytic work and techni-cal assistance—even if there is no fiscal spaceto lend to them.

On the scope of engagement:

• Continued focus on public finance manage-ment as the core area for state-level work ap-pears sound, whether engagement is confinedto this area or it serves as an entry point forbroader engagement.

• For states where the Bank plans or has a majorengagement (such as Orissa, Ceará, and Lagos),it might consider preparing a brief state strat-egy document. The lending programs and Bankbudgets in these states are often larger than theprograms for many Bank borrowing countries,and the use of a strategy document to focus thedialogue and get buy-in from counterparts,donors, and civil society could contribute to theBank’s effectiveness.

• Lower-cost lending instruments, such as DPLs,multisector SWAps, and reimbursable tech nical assistance (fee-for-service) seem to be a morenatural choice for high-capacity, better-off states, especially in middle-income countries.This will help to redirect more Bank resourcesto work with poorer and low-capacity states.

• The Bank’s new instruments (the state-levelDPL and multisector SWAp) can be especiallyeffective at the state level when they addresscross-sector issues (such as public sector re-form). However, the results frameworks un-derpinning these instruments need to beprepared in a manner commensurate with thecapacity available at the state level, with tech-nical assistance carefully designed to mitigaterelated risks and capacity constraints.

• Providing advisory services could be a con-venient entry point for the Bank to expand di-rect cooperation with state governments. Witha relatively small price tag, these types of in-terventions are highly valued at the state leveland are useful for forging closer partnerships.In the eyes of state governments, the Bankoften has a comparative advantage over privatesector providers, because it has access to in-ternational best practice and has gained cred-ibility through previous engagement.

On the modalities of engagement:

• There is considerable scope for greater im-pact from knowledge transfer and expandedknowledge services. There is particularly strongdemand for better knowledge sharing, bothwithin the Bank and across the countries con-cerned. This is not so much a matter of shar-ing of concepts and theories as it is of sharingpractical experience about what is workingand what is not (for example, multisector in-vestment lending in Brazil, reimbursable tech-nical assistance in Russia, and so on). Similarly,government officials in all countries have little knowledge of approaches being taken elsewhere.

• The Bank’s analytical work at the state level isof high quality and is appreciated by the au-thorities. Its relative scarcity, however, couldhamper the effective identification of high-impact, high-priority areas. There seems to bepotential for closer partnerships between stategovernments and the Bank in this area. Thereare three dimensions to this: (i) widening thescope of ESW at the state level; (ii) strongerpartnerships with the state governments inthe Bank’s ESW; and (iii) wider disseminationand better marketing of the Bank’s ESW tostate officials. More client participation in an-alytical work will improve the sense of owner-ship, which will increase the chances of linkingit with lending and ensure consideration oflocal conditions.

• Partner state governments become increas-ingly exposed to the risks of foreign exchangerate fluctuation—something they normally arenot equipped to handle, which puts their debtsustainability at risk. It will be quite useful forthe Bank to explore ways of helping the stategovernments to develop mechanisms to hedgerisks related to foreign exchange fluctuation, aswell as maturity, interest, and liquidity risks, pos-sibly through provision of technical assistanceor training.

• It is critical to have the federal governmentfirmly on board through assurance that state-level lending will not only stay within the fed-eral rules, but will also help reinforce theimplementation of federal laws and programs.

SUMMARY OF FINDINGS

5 1

Walking over a bridge, India. Photo by Ray Witlin, courtesy of the World Bank Photo Library.

5 3

To understand the performance of the portfolio,this review looked at projects that were approvedduring or after fiscal 1998 and closed during the evaluation period. The data do not provideclear evidence of state-level projects outper-forming federal projects (or vice versa), but somecountry-specific results do emerge:

Brazil: Forty-five projects closed in Brazil over theevaluation period; 33 of these were federal proj-ects and the remaining 12 were state-level proj-ects. At the aggregate, Brazil outperformed theLatin America and Caribbean Region, with over

97 percent of projects rated satisfactory. When dis-aggregated, the state-level projects were seen toperform close to the Region’s average. In theevaluation period, only two state-level projects didnot receive a satisfactory rating,1 while only oneof the federal-level projects did not receive a sat-isfactory rating. This shows that projects in Brazilgenerally perform well once they are approved.

India: Thirty-nine projects closed in India overthe evaluation period; 13 of these were federalprojects and the remaining 26 were state projects.At the aggregate, India outperformed the South

APPENDIX A: PORTFOLIO PERFORMANCE

Table A.1: Percentage of Projects Rated Satisfactory or Higher for Approval YearsFiscal 1998–2008

Total number Outcome Sustainabilityevaluated satisfactory (%) likely (%)

Latin America and Caribbean Region 304 84.1 84.0

Brazil overall 45 99.3 97.6

Federal 33 93.4 87.8

States 12 99.2 83.3

South Asia Region 115 81.9 79.1

India Overall 39 90.0 87.2

Federal 13 91.2 92.3

States 26 89.2 84.6

Africa Region 308 75.1 69.1

Nigeria overall 4 58.1 75

Federal 1 100.0 100.0

States 3 77.6 66.6

Europe and Central Asia Region 320 87.0 85.5

Russian Federation overall 8 48.9 75.0

Federal 7 22.5 71.4

Region 1 100.0 100.0

Bank-wide 1,309 83.4 79.4Source: World Bank data as of April, 2009.

Asia Region, with over 87 percent of projectsrated satisfactory. Only five projects did not receivea satisfactory rating; of these, four were in the en-ergy sector, one at the federal level (coal reha-bilitation project), and the other three were at thestate level (Haryana Power Adaptable ProgramLoan, Uttar Pradesh Power Sector Reform, and Rajasthan Power Sector Reform).2 This indicatesthat although India has generally performed well,it has had persistent problems with the power sec-tor, both at the state and the federal level.

Nigeria: Four projects closed in Nigeria over theevaluation period; one was a federal project andthe remaining three were state programs de-signed to roll out to all states. Only one, the uni-versal education project, a state program, receivedan unsatisfactory rating. This project targeted 16 of Nigeria’s 36 states. One of the reasons thisproject failed to reach its objectives was that therewas a limited number of states committed to re-

forms. There is currently another education proj-ect that targets only three states and the latest Interim Status Report shows that its performanceis satisfactory. This could indicate that state pro-grams that include a smaller number of statesdeliver better results.

Russia: Of the eight projects that closed in Rus-sia over the evaluation period, seven were federalprojects. The only subnational project was theKazan municipal project,3 which received a satis-factory rating. Russia’s portfolio showed a lowerpercentage of satisfactory ratings (75 percent)compared with the Europe and Central Asia Region (85 percent) mainly because two largefederal projects (Structural Adjustment Loan [SAL]II and II) closed during this time with unsatis -factory ratings. Both SAL I (fiscal 1998) and SALII (fiscal 1999) failed to reach the structural re-forms planned because Russia was going througha financial crisis during this time.

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WORLD BANK ENGAGEMENT AT THE STATE LEVEL

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APPENDIX B: KEY FISCAL INDICATORS AND THE LEGAL FRAMEWORK AT THE STATE LEVEL

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WORLD BANK ENGAGEMENT AT THE STATE LEVEL

Table B.1: Key Fiscal Indicators and the Legal Framework at the State Level

Indicator/framework Brazil Indiaa Nigeria Russian FederationTax allocation

State/regional share ofconsolidated tax revenue

Expenditure allocation

State/regional share of total expenditure

Federal transfer to states

Legal framework

9.3% of GDP (2008)

25.5% of total taxrevenue (2008)

10.7% of GDP (2007)

2.7% of GDP (2006)

Fiscal ResponsibilityLaw

Prohibits stateborrowing if:

(i) the net consolidateddebt exceeds twice net current revenue(RLC—Receita LiquidaCorrente);

(ii) new credit operationsexceed 16% of RLC;

(iii) debt service exceeds11.5% of RLC;

(iv) spending exceeds 60 percent of the netcurrent revenue; and

(v) the debt reductionschedules set by thedebt renegotiationcontracts are violated.

6.2% of GDP (2007–08)

36% of total tax revenue(2007–08)

15.6% of GDP (2007–08)

56.6% of totalexpenditure (2007–08)

5.2% of GDP (2007–08)

Fiscal ResponsibilityActs of individualstates

The State acts had threefocal points:

(i) zero revenue deficit(or surplus) by 2008–09,

(ii) maximum 3% ofgross state domesticproduct as fiscal deficitby 2008–09 and

(iii) a mid-year report onprogress to the statelegislature.

The present set of actswill be valid until theend of 2009–10 only.

1.4% of GDP (2007)

7.0% of total taxrevenue (2007)

9.3% of GDP (2007)

39.2% of totalexpenditure (2007)

7.7% of GDP (2007)

National DebtManagementFramework

Domestic debt for stategovernments:

(i) Federally guaranteeddomestic loans: Fromtime to time the DebtManagement Office willestablish limits onborrowings with anofficial guarantee.

(ii) Capital markets: Total amount of loansoutstanding at anyparticular time shall not exceed 50% of theactual revenue of thebody concerned for thepreceding 12 months.

(iii) Commercial Banks:The monthly debt ser viceratio of a subnationalshould not exceed 40%of its monthly federationaccounts allocation ofthe preceding 12 months.

9.9% of GDP

26.6% of total taxrevenue (as of Jan. 2007)

15% of GDP

29% of total expenditure(2008).

2.3% of GDP (2007)

Budget code

(i) Budget deficit ofregional governmentcannot exceed 15% of current revenues(10% for heavilysubsidized regions).

(ii) The net consolidateddebt of regional govern -ment cannot exceedcurrent revenues (it canreach 50% for heavilysubsidized regions).

(iii) Budget deficit ofmunicipal governmentcannot exceed 10% of current revenues (5%for heavily subsidizedmunicipals).

(iv) The net consolidateddebt of municipal gov -ern ment cannot exceedcurrent revenues (it canreach 50% for heavilysubsidized municipals).

Sources: Brazil: Instituto Brasileiro de Planejamento Tributario (IBPT), February 2009; consultant report. India: Ministry of Finance 2008; consultant report. Nigeria: Central Bank of Nigeriavarious years; consultant report. Russia: www.roskazna.ru—the official site of the Russian Federation Treasury with the RF Ministry of Finance and consultant report.Note: Only the highlights of the legal framework in each country are shown.a. All data for India are based on budget estimates.

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The countries included in this study differ in theirintegration into the world markets, with conse-quent variation in their degrees of exposure to thecalamity caused by the global financial crisis. Ingeneral, all four countries have seen an outflowof foreign capital, smaller export volume, fallingcommodity prices, and falling revenues. It is thefall in revenue collection that has one of the mostsignificant implications for the federal-state fiscalrelationship through transfer of revenues, andconsequently the demand for foreign borrowing.At the same time, there is a possibility (noted byseveral state-level counterparts to the IEG mission)that growing demand at the federal level will de-crease the amount of resources potentially avail-able for direct lending to state governments.

The global meltdown has resulted in a gradual erosion of state government revenues. In India,because of both the recessionary tendencies andtax cuts, growth in tax revenues is estimated toslow in fiscal 2008–09 and 2009–10. Since a por-tion of the central tax revenue is shared withstates, the total revenues of the states are likelyto suffer significantly.

In Nigeria, state government revenues are largelydependent on federal transfers, which in turndepend largely on movement in crude oil prices.The fall in crude oil prices has resulted in a sub-stantial reduction in federal transfers to states—by about half of the allocation made in July 2008.

In the Russia, regional governments were thefirst to demonstrate reduction of tax proceeds ona monthly basis. In October 2008, their revenueswere the first to shrink (by 24 percent compared

with October 2007), while federal revenues grewby 1.5 percent. In the period of October 2008through January 2009, compared with the samefour months of the previous year, federal gov-ernment revenues on the whole decreased by 10 percent, while regional revenues decreased by14 percent.

How will this decline in the growth of revenue af-fect Bank lending to the states? One would expectstate governments to ultimately increase theirdemand for external loans. Although there havenot been any explicit examples of this happeningyet, there are indications that both the federal andstate governments are taking measures to facili-tate state-level lending. For example, in Brazilseveral initiatives to amend the Fiscal Responsi-bility Law (FRL) are running in the National Con-gress. The recent successful debt rescheduling forRio Grande do Sul, which ultimately made thisstate eligible to borrow from the World Bank, isone such example.

Similarly, the government of India has allowedstates to amend their Fiscal Responsibility andBudget Management Act (FRBM) target of a 3percent fiscal deficit to 3.5 percent for 2009–10.While this amendment has allowed the states inIndia an additional borrowing of 0.5 percent ofgross state domestic product (GSDP), they arecareful about borrowing because the exchangerate risk now falls on the state governments be-cause of the back-to-back on-lending system thatwas introduced in 2004.1 The depreciation of therupee brought about by the global financial cri-sis means that borrowing from the Bank is gettingmore and more expensive for the states.

APPENDIX C: THE GLOBAL FINANCIAL CRISIS AND STATE-LEVEL LENDING

For now, state governments in Nigeria are partiallyinsulated from the global crisis. The pre-crisis oilboom allowed the accumulation of substantialexternal reserves—about US$60 billion—with 30months of import cover. The federal governmentalso built up excess crude reserves on behalf ofall tiers of government. So far, the federal gov-ernment has used the excess reserves to augmentthe statutory allocations to state governments.However, this cushion will not be sustainable if thecrisis persists. Federal transfers to the states havealready fallen by half compared with the previousyear, and the states will require external fundingif the crisis continues.

In Russia, some of parties interviewed by the IEGmission believed that the new economic situationmay soon bring about a turn in the federal gov-ernment’s borrowing policy. The Federal Min-istry of Finance has been considering the idea ofresuming borrowing from the international fi-nancial institutions. However, it is quite likelythat the bulk of new borrowing will occur at thefederal level. Another hurdle to expanding sub-national lending is that the most creditworthyregions, such as the Republic of Tatarstan, havethe least fiscal space for new borrowing and willnot be in a position to undertake new debt lia-bilities in the near future.

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WORLD BANK ENGAGEMENT AT THE STATE LEVEL

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APPENDIX D: COUNTRIES AT A GLANCE

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WORLD BANK ENGAGEMENT AT THE STATE LEVEL

Brazil at a GlanceBrazil at a Glance

APPENDIX D: COUNTRIES AT A GLANCE

6 1

India at a GlanceInndia at a Glancee

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WORLD BANK ENGAGEMENT AT THE STATE LEVEL

APPENDIX D: COUNTRIES AT A GLANCE

6 3

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WORLD BANK ENGAGEMENT AT THE STATE LEVEL

Nigeria at a GlanceNiigeria at a Glancce

APPENDIX D: COUNTRIES AT A GLANCE

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6 6

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

Russian Federation at a GlanceRussian Federation at a Glance

APPENDIX D: COUNTRIES AT A GLANCE

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APPENDIX E: KEY STATE SOCIAL AND ECONOMIC INDICATORS

Table E.1: Brazil: Key State Social and Economic Indicators

Human Infant Anticipated GDPPopulation Development Literacy mortality life per capita

Area (in (2005, Index rate rate (2007, expectancy (2005, PPP,State million km2) millions) (2005) (2003) out of ‘000) (2007) in US$)

Acre 0.15 0.66 0.75 0.84 30.70 71.40 2,928

Alagoas 0.03 3.02 0.68 0.70 50.00 66.80 2,051

Amapá 0.14 0.59 0.78 0.91 23.90 70.40 3,214

Amazonas 1.57 3.23 0.78 0.94 25.90 71.60 4,516

Bahia 0.56 1.82 0.74 0.79 33.40 72.00 2,880

Ceará 0.15 8.10 0.72 0.78 29.70 70.30 2,211

Distrito Federal 0.01 2.33 0.87 0.96 16.80 75.30 16,502

Espírito Santo 0.05 3.41 0.80 0.90 18.90 73.70 6,059

Goiás 0.34 5.62 0.80 0.90 19.40 73.40 3,935

Maranhão 0.33 6.10 0.68 0.77 39.20 67.60 1,816

Mato Grosso 0.90 2.80 0.80 0.90 20.40 73.10 5,849

Mato Grosso do Sul 0.36 2.26 0.80 0.91 18.50 73.80 4,182

Minas Gerais 0.59 19.24 0.80 0.89 20.40 74.60 4,381

Pará 1.25 6.97 0.76 0.90 24.40 72.00 2,458

Paraíba 0.06 3.60 0.72 0.75 38.00 69.00 2,052

Paraná 0.20 1.26 0.82 0.93 18.60 74.10 5,400

Pernambuco 0.10 8.41 0.72 0.79 38.40 68.30 2,595

Piauí 0.25 3.01 0.70 0.72 28.20 68.90 1,619

Rio de Janeiro 0.04 15.38 0.83 0.96 19.60 73.10 7,024

Rio Grande do Norte 0.05 3.00 0.74 0.77 34.80 70.40 2,603

Rio Grande do Sul 0.28 10.85 0.83 0.95 13.50 75.00 5,824

Rondônia 0.24 1.53 0.78 0.92 23.70 71.20 3,679

Roraima 0.22 0.39 0.75 0.91 19.10 69.90 3,554

Santa Catarina 0.10 5.87 0.84 0.95 16.10 75.30 6,362

São Paulo 0.25 40.44 0.83 0.95 15.50 74.20 7,867

Sergipe 0.02 1.97 0.74 0.90 33.80 70.90 2,985

Tocantins 0.28 1.31 0.76 0.83 27.30 3,044Sources: The Brazilian Institute for Geography and Statistics (IBGE), Ministry of Planning; World Bank data.Note: PPP = purchasing power parity.

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WORLD BANK ENGAGEMENT AT THE STATE LEVEL

Table E.2: India: Key State Social and Economic Indicators

Per capita Per capitanet state net state

Literacy domestic product domestic productDensity Literacy rate (2004–05, (2004–05,

Area Population (per sq. rate (2004–05 current price, current price,State (‘00 sq. km.) (‘000) km.) (2001 census) census) in rupees) in US$)

Andhra Pradesh 275 76,210 277 61 53 23,153 526.2

Arunachal Pradesh 84 1,098 13 54 60 19,724 448.3

Assam 78 26,656 340 63 71 13,633 309.8

Bihar 94 82,999 881 47 46 5,772 131.2

Chhattisgarh 135 20,834 154 65 57 13,013 295.8

Goa 4 1,348 364 82 75 58,184 1,322.4

Gujarat 196 50,671 258 69 66 28,355 644.4

Haryana 44 21,145 478 68 62 32,712 743.5

Himachal Pradesh 56 6,078 109 77 72 27,486 624.7

Jammu and Kashmir 222 10,144 100 56 61 16,190 368.0

Jharkhand 80 26,946 338 54 52 23,945 544.2

Karnataka 192 52,851 276 67 61 27,048 614.7

Kerala 39 31,841 819 91 83 14,069 319.8

Madhya Pradesh 308 60,348 196 64 54 15,073 342.6

Maharashtra 308 96,879 315 77 70 32,170 731.1

Manipur 22 2,294 103 71 76 14,901 338.7

Meghalaya 22 2,319 103 63 78 19,572 444.8

Mizoram 21 888 42 89 90

Nagaland 17 1,990 120 67 78

Orissa 156 36,804 236 63 57 13,601 309.1

Punjab 50 24,359 484 70 68 30,701 697.8

Rajasthan 342 56,507 165 60 50 16,212 368.5

Sikkim 7 541 76 69 75 24,115 548.1

Tamil Nadu 130 62,406 480 74 70 25,965 590.1

Tripura 10 3,199 305 73 74

Uttar Pradesh 241 166,198 690 72 64 11,477 260.8

Uttaranchal Pradesh 53 8,489 159 56 51

West Bengal 89 80,176 903 69 66 22,497 511.3

Union Territory

A.& N. Islands 8 356 43 81 77

Chandigarh 0.1 901 7,900 82 84 67,370 1,531.1

D. & Nagar Haveli 0.5 220 449 58 58

Daman & Diu 0.1 158 1,413 78 76

Delhi 1.5 13,851 9,340 82 80 53,976 1,226.7

Lakshadweep 0.03 61 1,895 87 78

Pondicherry 0.5 974 2,030 81 74 56,034 1,273.5

All India 3,287 1,028,737 325 65 60 22,946 521.5Source: Economic Survey, 2007–08, Office of the Registrar General; State Statistical Bureaus and Central Statistical Organization, government of India.

APPENDIX E: KEY STATE SOCIAL AND ECONOMIC INDICATORS

7 1

Table E.3: Nigeria: Key State Economic and Social Indicators

GDPAccess to Net (2005) GDP

primary primary Adult Youth Population billions per capitaState Zone school enrolment literacy literacy (millions) of naira (US$)

1 Abita South East 78.9 82.6 79.2 94.2 2.83 234.6 627.02 Adamawa North East 76.1 64.0 56.1 71.3 3.17 40.2 96.03 Akwa Ibom South South 56.8 78.5 81.6 92.7 3.93 1,129.4 2,178.24 Anambra South East 65.1 85.1 77.8 94.0 4.18 171.9 3,11.45 Bauchi North East 68.7 40.1 39.5 49.0 4.68 204.3 3,31.06 Bayelsa South South 88.0 72.2 64.3 73.3 1.70 1,419.9 6,315.27 Benue North Central 63.2 77.4 67.0 83.7 4.22 438.0 786.58 Borno North East 72.6 34.3 27.4 36.0 4.15 176.7 322.59 Cross River South South 72.4 77.0 75.5 90.7 2.89 228.7 599.6

10 Delta South South 71.9 78.1 72.9 86.4 4.10 1,453.9 2,687.411 Ebonyi South East 32.7 75.0 57.7 85.9 2.17 126.8 442.012 Edo South South 79.7 76.8 77.0 91.6 3.22 226.4 532.813 Ekiti South West 89.0 89.1 75.0 98.6 2.38 142.0 451.214 Enugu South East 62.7 79.9 75.6 96.2 3.26 129.9 302.015 Gombe North East 82.6 33.4 54.3 53.1 2.35 114.1 367.216 Imo South East 52.3 84.4 75.4 92.7 2.93 280.8 724.717 Jigawa North West 72.9 29.6 38.7 40.9 4.35 103.6 180.518 Kaduna North West 84.2 66.1 66.4 76.8 6.07 364.2 454.719 Kano North West 76.5 47.8 57.5 62.6 388.920 Katsina North West 74.0 45.1 36.5 45.0 5.79 167.4 218.921 Kebbi North West 72.2 32.9 51.1 61.1 3.24 100.1 234.022 Kogi North Central 88.1 80.5 64.5 89.7 3.28 297.1 686.523 Kwara North Central 83.8 79.8 55.6 78.0 2.37 163.6 522.824 Lagos South West 93.9 81.8 89.9 97.5 9.01 1,701.0 1,429.625 Nassarawa North Central 79.6 66.5 53.7 68.0 1.86 90.4 367.626 Niger North Central 88.6 57.5 36.5 53.8 3.95 204.6 392.427 Ogun South West 85.3 83.6 69.6 93.2 3.73 131.6 267.428 Ondo South West 86.2 84.5 76.6 97.4 3.44 604.1 1,330.029 Osun South West 86.7 84.1 74.8 97.5 3.42 178.0 393.930 Oyo South West 84.5 77.1 73.3 94.7 5.59 467.2 632.931 Plateau North Central 74.9 79.3 61.6 77.0 3.18 145.5 346.732 Rivers South South 70.1 75.9 82.6 93.9 5.19 2,125.8 3,105.833 Sokoto North West 80.5 32.1 70.3 76.7 3.70 95.7 196.034 Taraba North East 70.2 59.0 55.7 65.2 2.30 35.8 117.735 Yobe North East 62.2 35.5 25.3 37.6 2.32 60.6 197.736 Zamfara North West 64.7 26.1 53.4 59.5 3.26 109.6 2,54.7

FCT North Central 94.9 83.4 79.0 82.8 1.41 395.4 2,131.9North East 71.9 43.7 42.2 52.5North Central 79.7 72.5 58.3 77.3North West 76.4 42.2 54.5 63.3South East 60.6 81.6 75.7 94.1South South 71.7 76.8 78.0 91.3South West 88.0 82.3 79.2 96.5National 75.9 61.5 65.7 80.2

Source: National Bureau of Statistics, 2006 Core Welfare Indicator Questionnaire (CWIQ) Survey and Economic Associates (an economic consulting firm) for state GDP data.

7 2

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

Table E.4: Russian Federation: Key State Economic and Social Indicators

Infant Population withdeaths Life money incomes

GDP, US under 1 expectancy Number below subsistenceArea, $/per year old at birth of physicians minimum as1,000 capita, Population per 1,000 (number per 10,000 percentage of the

Constituent regions sq. km 2006 (1,000) 2006 live births of years) population total population

Central Federal Okrug

1 Belgorod Oblast 27.1 4,545 1,512 8.6 69.27 40.7 15.8

2 Bryansk Oblast 34.9 2,350 1,346 7.8 65.3 36.7 19.2

3 Vladimir Oblast 29.0 2,899 1,487 7.8 64.44 34.4 29.6

4 Voronezh Oblast 52.4 2,691 2,334 8.2 67.11 54.3 19.6

5 Ivanovo Oblast 23.9 1,821 1,115 9.1 64.49 52 35.2

6 Kaluga Oblast 29.9 3,183 1,022 10.8 66.03 39.4 17.2

7 Kostroma Oblast 60.1 2,854 717 14.5 64.62 36.8 20.0

8 Kursk Oblast 29.8 3,241 1,199 9.9 66.06 50.4 15.7

9 Lipetsk Oblast 24.1 6,056 1.19 8.1 66.73 41.9 11.3

10 Moscow Oblast 46.0 5,370 6.63 8.6 66.4 37.4 12.6

11 Oryol Oblast 24.7 2,857 842 10.1 66.39 39 21.6

12 Ryazan Oblast 39.6 3,329 1,195 11.3 65.23 54.6 19.4

13 Smolensk Oblast 49.8 3,010 1,019 10.3 63.01 60.8 19.7

14 Tambov Oblast 34.3 2,652 1,145 9.7 66.84 35 15.1

15 Tver Oblast 84.1 3,410 1,425 10.5 62.85 53 14

16 Tula Oblast 25.7 3,423 1,622 8.9 64.23 35 15.1

17 Yaroslavl Oblast 36.4 4,488 1,339 8.2 66.11 58.8 13.8

18 City of Moscow 1.0 18,73 10,407 7.9 71.81 78.6 13.5

North-West Federal Okrug

19 Republic of Karelia 172.4 4,719 703 7.6 63.79 49.3 15.7

20 Republic of Komi 415.9 8,214 996 7 64.21 46.1 15.4

21 Arkhangelsk Oblast 410.7 6,097 1,263 10.2 64.84 53.2 17.6

22 Nenets AO 176.7 — 42 15.2 62.24 39.3 8.83

23 Vologda Oblast 145.7 6,410 1,245 8.6 65.36 35.5 17.5

24 Kaliningrad Oblast 15.1 4,042 945 7.1 64.13 36.9 14.6

25 Leningrad Oblast 85.3 6,143 1,653 7.9 63.06 31.2 14.7

26 Murmansk Oblast 144.9 6,893 873 10.3 65.17 48.3 18.7

27 Novgorod Oblast 55.3 4,203 674 11.4 62.66 40.4 17.8

28 Pskov Oblast 55.3 2,610 737 13.2 61.22 34.4 18.5

29 City of St. Petersburg 0.6 6,737 4.6 4.7 68.9 83.5 9.7

South Federal Okrug

30 Republic of Adygeya 7.6 1,799 445 8 68.27 38.4 34.3

31 Republic of Dagestan 50.3 1,695 2,622 14.8 73.35 40 11.9

32 Ingush Republic 4.3 0.664 482 31.4 76.02 23.4 57.4

33 Kabarda-Balkar Republic 12.5 1,778 897 16.1 70.14 44.2 19.8

APPENDIX E: KEY STATE SOCIAL AND ECONOMIC INDICATORS

7 3

34 Republic of Kalmykia 76.1 1,623 290 14.2 67.52 50.1 48.7

35 Karachai-Circassian Republic 14.1 2,002 435 10.7 70.19 36.4 19.7

36 Republic of North Ossetia 8.0 2,316 704 9.8 70.74 67.4 16.3

37 Republic of Chechnya 15.0 0.946 1,141 16.7 73.08 20.8 …

38 Krasnodar Krai 76.0 3,470 5.1 8.2 68.74 43.1 22.9

39 Stavropol Krai 66.5 2,509 2,718 10.1 68.25 45.2 21.6

40 Astrakhan Oblast 44.1 3,235 998 10.7 66.14 67.1 17

41 Volgograd Oblast 113.9 3,601 2,655 11.2 67.84 49.4 11.2

42 Rostov Oblast 100.8 2,975 4,334 13.2 67.61 38.7 18.1

Privolgskiy Federal Okrug

43 Republic of Bashkortostan 143.6 4,734 4,079 10.9 67.47 42.7 14.7

44 Republic of Mari El 23.2 2,277 717 11.1 64.82 34.5 30.7

45 Republic of Mordovia 26.2 2,528 866 6.8 67.75 51.7 29.0

46 Republic of Tatarstan 68.0 6,115 3.769 8.2 69.04 45.3 10

47 Republic of Udmurtia 42.1 4,017 1,553 10.8 66.01 58.3 19.7

48 Chuvash Republic 18.3 2,706 1,299 9.1 66.98 48.1 22.0

49 Kirov Oblast 120.8 2,552 1,461 9.9 65.8 45.7 23.9

50 Nizhny Novgorod Oblast 74.8 4,260 3,445 11.5 64.6 47 16.4

51 Orenburg Oblast 124.0 5,339 2.15 9.9 66.17 49.1 19.4

52 Penza Oblast 43.2 2,467 1,423 10.6 67.25 38.7 23.8

53 Perm krai 160.6 5,452 2.77 11.6 63.99 53.7 14.7

54 Samara Oblast 53.6 5,847 3,201 7.3 66.57 49.9 17.2

55 Saratov Oblast 100.2 2,930 2,626 9.1 67.37 52 22.3

56 Ulianovsk Oblast 37.3 2,896 1,351 10.1 66.33 36.4 24.9

Ural Federal Okrug

57 Kurgan Oblast 71.0 2,590 992 14.2 65.52 27.7 24.3

58 Sverdlovsk Oblast 194.8 5,648 4,428 8.7 66.47 42.5 12.2

59 Tyumen Oblast 161.8 9,441 1,316 8.4 67.95 49.7 11.5

60 Khanty-Mansi AO 523.1 33,408 1,469 7.5 68.84 50.7 7.93

61 Yamal-Nenets AO 750.3 29,183 523 13 68.86 49 7.03

62 Chelyabinsk Oblast 87.9 4,768 3,551 9.1 66.17 41.1 12.4

Sibir Federal Okrug

63 Republic of Altai 92.6 2,066 204 15.3 62.49 39.7 37.8

64 Republic of Buryatia 351.3 3,576 969 12.5 62.43 39.3 29,7

(Table continues on next page)

Table E.4: Russian Federation: Key State Economic and Social Indicators (continued)

Infant Population withdeaths Life money incomes

GDP, US under 1 expectancy Number below subsistenceArea, $/per year old at birth of physicians minimum as1,000 capita, Population per 1,000 (number per 10,000 percentage of the

Constituent regions sq. km 2006 (1,000) 2006 live births of years) population total population

7 4

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

Table E.4: Russian Federation: Key State Economic and Social Indicators (continued)

Infant Population withdeaths Life money incomes

GDP, US under 1 expectancy Number below subsistenceArea, $/per year old at birth of physicians minimum as1,000 capita, Population per 1,000 (number per 10,000 percentage of the

Constituent regions sq. km 2006 (1,000) 2006 live births of years) population total population

65 Republic of Tyva 170.5 1,822 308 15.1 58.43 42.9 38.7

66 Republic of Khakassia 61.9 3,606 541 15.6 64.51 38.8 25.1

67 Altai Krai 169.1 2,517 2,565 11.2 66.64 46.8 20.1

68 Krasnoyarsk Krai 2,339.7 7,673 2,925 12.9 65.58 49.6 19.3

69 Irkutsk Oblast 767.9 4,872 2,545 11.8 63.06 46.2 19.6

70 Kemerovo Oblast 95.5 4,524 2,855 10.3 63.04 47 11.7

71 Novosibirsk Oblast 178.2 4,119 2,662 9.6 66.38 58.8 21.9

72 Omsk Oblast 139.7 4,631 2,047 8.8 66.17 55.9 16

73 Tomsk Oblast 316.9 6,853 1,037 13.8 66.5 67.6 14.5

74 Zabajkalsk Krai 431.5 2,958 1,136 10.2 61.43 54.9 24.5

Far-East Federal Okrug

75 Republic of Sakha

(Yakutia) 3,103.2 8,229 951 10.6 65.55 54 20.3

76 Primorski Krai 165.9 3,941 2,036 10.7 64.4 52.9 23.8

77 Khabarovsk Krai 788.6 5,289 1.42 12.3 63.67 59 18.2

75 Amur Oblast 363.7 3,949 887 17.4 62.23 60.2 31.1

79 Kamchatka Krai 472.3 352 12.2 65.19 52.5 27.1

80 Magadan Oblast 461.4 6,670 175 14.2 63.4 56.2 19.0

81 Sakhalin Oblast 87.1 11,794 532 12.9 62.79 45.8 16.2

82 Jewish AO 36.0 3,647 189 14.3 61.27 36.4 25.4

83 Chukotka AO 737.7 11,008 51 23.2 58.93 81.6 13.1Sources: Federal State Statistics Service of Russian Federation; World Bank data.

7 5

APPENDIX F: DISTRIBUTION OF PROJECTS BY STATES

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Table F.1: Brazil: Distribution of Projects by States

Total projects = 0

Total projects = 0

Total projects = 1Environment = 1

Total projects = 1Health = 1

Total projects = 9Agriculture = 3;Education = 2; Health = 1; Transport = 1;Urban development = 1;Water = 1

Acre

Alagoas

Amapa

Amazonas

Bahia Rural PovertyAlleviation Project,Bahia (approvedfiscal 1995; exitedfiscal 2001)

Bahia, Rural PovertyReduction Project(fiscal 2001)

Bahia, StateIntegrated Project:Rural Poverty (fiscal 2006)

Bahia, BasicEducation ProjectPhase I (fiscal 2001)

Bahia EducationProject (APL),Second Phase (fiscal 2001)

Amapa SustainableCommunities (fiscal 2005)

Alto Solimoes BasicServices and Sustainable Devel-opment Proj ect I (fiscal 2008)

Bahia, State HealthSystem Reform (fiscal 2003)

Bahia IntegratedState HighwayManagement (fiscal 2007)

Bahia Poor Urban AreasIntegratedDevelopment(fiscal 2006)

Bahia WaterResourcesManagement(fiscal 1998)

Sector

Agriculture Economic policyand rural governance, Urban

State development and finance Education Health Environment Transportation development Water Summary

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Total projects = 8Agriculture = 3 +1(additional financing);Economic policy &governance = 1;Education = 1 ; Urban development = 1;Water = 1

Total projects = 0

Total projects = 2Water = 2

Total projects = 1Transport = 1

Ceará

Distrito Federal

EspíritoSanto

Goiás

Ceará, Rural PovertyReduction Project (fiscal 2001)

Ceará Water PilotProject (approvedfiscal 1997; exitedfiscal 2002)

Rural PovertyAlleviation Project,Ceará (approvedfiscal 1995; exitedfiscal 2001)

Ceará, Rural Poverty Reduction—additional financing (fiscal 2006)

Ceará MultisectorSocial InclusionDevelopment APL(fiscal 2006)

CEARÁ BasicEducation Quality Project (fiscal 2001)

Goias StateHighwayManagement (fiscal 2002)

Ceará UrbanDevelopment &Water Resource(approved fiscal1995, exited fiscal 2004)

Ceará IntegratedWater ResourcesManagementProject (fiscal 2000)

Espírito SantoWater and CoastalPollution (approvedfiscal 1994, exitedfiscal 2003)

Espirito SantoWater and CoastalPollutionManagement(fiscal 2005)

(Table continues on next page)

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Table F.1: Brazil: Distribution of Projects by States (continued)

Sector

Agriculture Economic policyand rural governance, Urban

State development and finance Education Health Environment Transportation development Water Summary

Total projects = 3Agriculture = 2;Transport = 1

Total projects = 0

Total projects = 1Finance = 1

Total projects = 7Agriculture = 1;Economic policy &governance = 3;Education = 1;Urban development = 1;Water = 1

Maranhão

Mato Grosso

Mato Grosso do Sul

Minas Gerais

Maranhão, RuralPoverty AlleviationProjectMaranhão—Integrated Program:Rural PovertyReduction (fiscal 2004)

Minas Gerais RuralPoverty Reduction (fiscal 2006)

Mato Grosso StatePrivatization Project(approved fiscal1997, exited fiscal 2002)

Minas Gerais StatePrivatization (fiscal1998, cancelledafter Boardapproval)

Minas GeraisPartnership forDevelopment (fiscal 2006, DPL)

Minas GeraisDevelopmentPartnership II—SWAp (fiscal 2008)

Minas Gerais BasicEducation (approvedfiscal 1994, exited fiscal 2002)

Second StateHighwayManagementProject—States ofMaranhao, Piaui,and Tocantins(approved fiscal1994, exited fiscal 2000)

Minas GeraisMunicipalManagement andEnvironmentalInfrastructure(approved fiscal1994, exited fiscal 2002)

Minas GeraisWater Quality andPollution ControlProject (approvedfiscal 1993, exitedfiscal 2000)

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Total projects = 1Environment = 1

Total projects = 1Agriculture = 1

Total projects = 2Agriculture = 1;Education = 1

Total projects = 5Agriculture = 2 +1(additional financing); Education = 1;Urban development = 1

Total projects = 4Agriculture = 2 +1(additional financing); Transport = 1

Pará

Paraíba

Paraná

Pernambuco

Piauí

Paraíba—RuralPoverty AlleviationProject

PARANÁ—RuralPoverty Alleviationand NaturalResourcesManagementProject (approvedfiscal 1996, exitedfiscal 2006)

Rural PovertyAlleviation Project,Pernambuco(approved fiscal1997, exited fiscal 2002)

Pernambuco—RuralPoverty ReductionProject (fiscal 2001)

Pernambuco RuralPoverty Reduction—additional financ ing(fiscal 2007)

Rural PovertyAlleviation Project,Piauí (approvedfiscal 1997, exitedfiscal 2002)

Parana BasicEducation (approvedfiscal 1994, exited fiscal 2002)

PernambucoIntegratedDevelopment:Education QualityImprovement Project(fiscal 2008)

Pará IntegratedRuralDevelopment— APL (fiscal 2007)

Second StateHighwayManagementProject, States ofMaranhao, Piaui, andTocantins (approvedfiscal 1994, exitedfiscal 2000)

Recife UrbanUpgrading Project(fiscal 2003)

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Table F.1: Brazil: Distribution of Projects by States (continued)

Total projects = 3Finance = 1;Transport = 2

Total projects = 3Agriculture = 1 +1(additional financing); Water = 1

Paiui (continued)

Rio deJaneiro

Rio Grandedo Norte

Piauí, Rural PovertyReduction Project(fiscal 2001)

Piauí Rural Poverty Reduction—additional financing(fiscal 2006)

Rural PovertyAlleviation Project,Rio Grande do Norte(approved fiscal1997, exited fiscal 2002)

Rio Grande do NorteRural PovertyReduction—Additional Financing (fiscal 2002)

Rio de Janeiro State Reform–Privatization (fiscal 1998)

Rio de Janeiro Mass Transport(fiscal 1998)

Rio de Janeiro Mass Transport—additional financing(fiscal 2008)

Rio Grande doNorte— IntegratedWater ResourcesManagement(fiscal 2008)

Sector

Agriculture Economic policyand rural governance, Urban

State development and finance Education Health Environment Transportation development Water Summary

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Total projects = 3Agriculture = 1;Finance = 1;Transport = 1

Total projects = 0

Total projects = 0

Total projects = 3Agriculture = 1;Environment = 1;Transport. = 1

Total projects = 5Education = 1;Transport = 3+1(additional financing)

Total projects = 2Agriculture = 2

Rio Grandedo Sul

Rondônia

Roraima

Santa Catarina

São Paulo

Sergipe

Natural ResourcesManagement andRural PovertyAlleviation Project,Rio Grande do Sul(approved fiscal1997, exited fiscal 2006)

Santa Catarina—Natural ResourcesManagement andRural PovertyReduction (fiscal 2002)

Rural PovertyAlleviation Project,Sergipe (approvedfiscal 1995, exitedfiscal 2001)

Rio Grande do SulState Reform Project(approved fiscal1997, exited fiscal 1999)

Innovations in BasicEducation Project,Sao Paulo (approvedfiscal 1991, exitedfiscal 1999)

2nd LandManagementProject—SantaCatarina (approvedfiscal 1990, exitedfiscal 1999)

Rio Grande do SulState HighwayManagementProject (approved1997, exited fiscal 2006)

Santa CatarinaState HighwayManagementProject (approvedfiscal 1993, exitedfiscal 2000)

Sao PauloIntegrated UrbanTransport Project(fiscal 1998)

Sao Paulo MetroLine 4 (fiscal 1998)

Sao Paulo MetroLine 4—additionalfinancing (fiscal 2008)

Sao Paulo Trainsand Signaling (fiscal 2008)

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Table F.1: Brazil: Distribution of Projects by States (continued)

Total projects = 2Transport = 2

Sergipe(continued)

Tocantins

Sergipe, RuralPoverty Reduction(fiscal 2002)

Second StateHighwayManagementProject, States ofMaranhao, Piaui,and Tocantins(approved fiscal1994, exited fiscal 2000)

TocantinsSustainableRegionalDevelopment (fiscal 2004)

Sector

Agriculture Economic policyand rural governance, Urban

State development and finance Education Health Environment Transportation development Water Summary

Table F.2: India: Distribution of Projects by States

Total projects =0

Total projects =11Agriculture & rural = 5 +1 (additional financing);Economic policy = 3;Health = 1;Energy & mining = 1

Andaman &Nicobar

AndhraPradesh

Andhra PradeshDistrict PovertyInitiatives Project(fiscal 2000)

Andhra PradeshRural PovertyReduction Project(fiscal 2003)

Andhra PradeshRural PovertyReduction additional financing (fiscal 2008)

Andhra PradeshCommunity ForestManagement (fiscal 2003)

Chhattisgarh DistrictRural Poverty Project(fiscal 2003, DRPP)

Andhra PradeshCommunity TankManagementProject (fiscal 2007)

Andhra PradeshEconomic ReformLoan/Credit (fiscal 2002)

Second AndhraPradesh EconomicReform Loan (fiscal 2004, SAL II)Andhra PradeshEconomic ReformProject (fiscal 2007,DPL III)

Andhra PradeshPower SectorRestructuringProject (fiscal 1999,APL I)

Andhra PradeshEconomicRestructuring (fiscal 1998)

Sector

Agriculture Economic policyand rural governance, Energy Urban

State development and finance Education Health and mining Transportation development Water Summary

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Table F.2: India: Distribution of Projects by States (continued)

Total projects = 0

Total projects = 1Agriculture & rural = 1

Total projects = 3Agriculture & rural = 1;Economic policy = 1;Education = 1

Total projects = 0

Total projects = 0

Total projects = 0

Total projects = 0

Total projects = 0

Total projects = 0

Total projects = 2Transport = 1;Urban development = 1

ArunchalPradesh

Assam

Bihar

Chandigarh(UnionTerritory)

Chhattisgarh

Dadra andNagar Haveli(UnionTerritory)

Daman andDiu (UnionTerritory)

Delhi (UnionTerritory)

Goa

Gujarat

Bihar RuralLivelihoods Project (fiscal 2007)

Bihar DPL (fiscal 2008)

District PrimaryEducation Project III(fiscal 1998, Biharand Jharkhand)

Gujarat Highways(fiscal 2001)

Gujarat EmergencyEarthquakeReconstruct (fiscal 2002)

Sector

Agriculture Economic policyand rural governance, Energy Urban

State development and finance Education Health and mining Transportation development Water Summary

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Total projects = 2Agriculture = 1;Energy & mining = 1

Total projects = 3Agriculture & rural = 1;Economic policy = 1;Transport = 1

Total projects = 0

Total projects = 0

Total projects = 10Agriculture & rural = 4;Economic policy = 3;Health = 1;Transport = 1;Water = 1

Total projects = 4Agriculture & rural = 1; Transport = 1;Water = 2

Haryana

HimachalPradesh

Jammu andKashmir

Jharkhand

Karnataka

Kerala

Haryana PowerSector RestructuringAPL-I

Mid-Himalayan (HP)Watersheds (fiscal 2006)

KarnatakaWatershedDevelopment (fiscal 2001)

KarnatakaCommunity Based TankManagement (fiscal 2002)

KarnatakaPanchayatsStrengtheningProject (fiscal 2005)

Karnataka Tanks(fiscal 2008,supplement)

Kerala Forestry(fiscal 1998–2004)

Himachal PradeshDPL I (fiscal 2008)

Technical assistancefor Economic Reform Project (fiscal 2000)

First KarnatakaEconomicRestructuring (fiscal 2001, SAL I)

Second KarnatakaEconomicRestructuringProject (fiscal 2002,SAL II)

Haryana PowerSector RestructuringAPL-I

Karnataka HealthSystems (fiscal 2007)

Himachal PradeshState Roads Project(fiscal 07)

Karnataka Highways (fiscal 2001)

Kerala StateTransport (fiscal 2002)

Karnataka UWSImprovementProject (fiscal 2004)

Kerala Rural Water Supply andEnvironmentalSanitation (fiscal 2001)

(Table continues on next page)

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WO

RL

D B

AN

K E

NG

AG

EM

EN

T A

T T

HE

ST

AT

E L

EV

EL

Table F.2: India: Distribution of Projects by States (continued)

Total projects = 0

Total projects = 2;Agriculture &rural = 2

Total projects = 3Agriculture & rural = 1;Health = 1;Water = 1

Total projects = 0

Total projects = 2Transport = 1+1(additional financing)

Lakshad-weep (UnionTerritory)

MadhyaPradesh

Maharashtra

Meghalaya

Mizoram

Madhya PradeshDistrict PovertyInitiatives Project(fiscal 2001, DPIP I)

Madhya PradeshWater SectorRestructuring (fiscal 2005)

Maharashtra WaterSector Improvement(fiscal 2005)

Maharashtra HealthSystemsDevelopment (fiscal 1999)

Mizoram State oadsProject (fiscal 2002)

Mizoram Roads—Additional Financing (fiscal 2007)

Second KarnatakaRural Water Supplyand SanitationProject (fiscal 2002)

Maharashtra RuralWater Supply andSanitation“Jalswarajya”Project (fiscal 2004)

Sector

Agriculture Economic policyand rural governance, Energy Urban

State development and finance Education Health and mining Transportation development Water Summary

AP

PE

ND

IX F

: DIS

TR

IBU

TIO

N O

F P

RO

JE

CT

S B

Y S

TA

TE

S

87

Total projects = 0

Total projects = 3Economic policy = 2;Health = 1

Total projects = 0

Total projects = 2Transport = 1;Water = 1

Total projects = 6Agriculture & rural = 2; Education = 2;Health = 1;Energy & mining = 1

Total projects = 0

Total projects = 6Agriculture & rural = 2;Health = 1;Transport = 1;Urban development = 2

Nagaland

Orissa

Puducherry(UnionTerritory)

Punjab

Rajasthan

Sikkim

Tamil Nadu

Rajasthan DistrictPoverty InitiativesProject (fiscal 2000)

Rajasthan WaterSector RestructuringProject (fiscal 2002,RWSRP)

Tamil NaduEmpowerment andPoverty Reduction (fiscal 2006)

Tamil Nadu IrrigatedAgriculture Mod.and Water-BodiesRest andManagement (fiscal 2007)

Orissa Socio-EconomicDevelopment Loan(fiscal 2005, SAL I)

Orissa Socio-EconomicDevelopment Loan II (fiscal 2007)

Rajasthan DistrictPrimary EducationProject (fiscal 1999,DPEP)

Rajasthan SecondDistrict PrimaryEducation (fiscal2001, DPEP II)

Rajasthan Power I(fiscal 2001)

Orissa HealthSystems (fiscal 1998)

Rajasthan HealthSystemsDevelopment Project (fiscal 2004)

Tamil Nadu HealthSystems Project (fiscal 2005)

Punjab State RoadsProject (fiscal 2007)

Tamil Nadu RoadSector Project (fiscal 2003)

Tamil Nadu UrbanDevelopment II(fiscal 1999)

Tamil Nadu UrbanDevelopment III(fiscal 2006)

Punjab Rural Water Supply &Sanitation (fiscal 2007)

(Table continues on next page)

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WO

RL

D B

AN

K E

NG

AG

EM

EN

T A

T T

HE

ST

AT

E L

EV

EL

Table F.2: India: Distribution of Projects by States (continued)

Total projects = 0

Total projects = 1Agriculture & rural = 1

Total projects = 12Agriculture & rural = 4;Economic policy = 2;Education = 2;Health = 1;Energy & mining = 1,Transport = 1;Water = 1

Total projects = 0

Tripura

Uttaranchal

Uttar Pradesh

West Bengal

UttaranchalDecentralizedWatershedDevelopment (fiscal 2004)

Uttar PradeshForestry(fiscal 1998–2004)

Uttar Pradesh SodicLands Reclamation II(fiscal 1999–2008)

Uttar Pradesh WaterSector RestructuringProject (fiscal 2002)

Uttar PradeshDiversifiedAgricultural SupportProject (fiscal1998–2004)

Technical assistancefor Economic Reform Project (fiscal 2000)

Uttar Pradesh FiscalReform and PublicSector RestructuringProgram (fiscal 2008)

Uttar Pradesh BasicEducation Project II (fiscal 1998)

Uttar Pradesh ThirdDistrict PrimaryEducation (fiscal 2000, DPEP III)

Uttar Pradesh Power SectorRestructuringProject (fiscal 2000)

UP Health SystemsDevelopment Project (fiscal 2000)

Uttar Pradesh StateRoads Project (fiscal 2003)

Uttaranchal Rural Water Supply andSanitation (fiscal 2007)

Sector

Agriculture Economic policyand rural governance, Energy Urban

State development and finance Education Health and mining Transportation development Water Summary

AP

PE

ND

IX F

: DIS

TR

IBU

TIO

N O

F P

RO

JE

CT

S B

Y S

TA

TE

S

89

Table F.3: Nigeria: Distribution of Projects by States

Community-Number of driven Transport, Urban

State projects Health Education HIV/AIDS development Water Agriculture power development Governance

Abia

Adamawa

Akwa Ibom

Anambra

Bauchi

Bayelsa

Benue

Borno

Cross River

Delta

5

5

5

3

8

4

4

4

6

3

Health SystemDevelopment 2

Health SystemDevelopment 2

Health SystemDevelopment 2,Malaria

Health SystemDevelopment 2,Malaria

Health SystemDevelopment 2,Malaria

Health SystemDevelopment 2

Health SystemDevelopment 2

Health SystemDevelopment. 2

Health SystemDevelopment. 2

Health SystemDevelopment 2

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

Community-BasedPoverty Reduction,Community SocialDevelopment

Local Empowermentand EnvironmentManagement

Local Empowermentand EnvironmentManagement

Local Empowermentand EnvironmentManagement

Local Empowermentand EnvironmentManagement

Community-BasedPoverty Reduction

UrbanWater 2

Fadama 3

Fadama 2,Fadama 3

Fadama 3

Fadama 2,Fadama 3(WB)

Fadama 3

Fadama 3

Fadama 2,Fadama 3

Fadama 3

Fadama 3

Community- BasedUrban Development

Community- BasedUrban Development

State Governanceand CapacityBuilding

State Governanceand CapacityBuilding

(Table continues on next page)

90

WO

RL

D B

AN

K E

NG

AG

EM

EN

T A

T T

HE

ST

AT

E L

EV

EL

Ebonyi

Edo

Ekiti

Enugu

Gombe

Imo

Jigawa

Kaduna

Kano

6

5

5

5

5

4

8

4

Health SystemDevelopment 2

Health SystemDevelopment 2

Health SystemDevelopment 2

Health SystemDevelopment 2

Health SystemDevelopment 2,Malaria

Health SystemDevelopment 2

Health SystemDevelopment 2,Malaria

Health SystemDevelopment 2

Malaria

State EducationSector Project

State EducationSector Project

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

Community- BasedPoverty Reduction, Community SocialDevelopment

Community-BasedPoverty Reduction,Community SocialDevelopment

Local Empowermentand EnvironmentManagement

Local Empowermentand EnvironmentManagement

UrbanWater 1

UrbanWater 1

Fadama 3

Fadama 3

Fadama 3

Fadama 3

Fadama 2,Fadama 3

Fadama 2,Fadama 3

Fadama 2,Fadama 3

Fadama 3

Rural Accessand MobilityProject 1

Community- BasedUrbanDevelopment

Community- Based UrbanDevelopment

Community Based UrbanDevelopment

State Governanceand Capacity Building

Table F.3: Nigeria: Distribution of Projects by States (continued)

Community-Number of driven Transport, Urban

State projects Health Education HIV/AIDS development Water Agriculture power development Governance

AP

PE

ND

IX F

: DIS

TR

IBU

TIO

N O

F P

RO

JE

CT

S B

Y S

TA

TE

S

91

Katsina

Kebbi

Kogi

Kwara

Lagos

Nasarawa

Niger

Ogun

Ondo

Osun

Oyo

3

6

4

4

8

4

5

6

4

3

5

Health SystemDevelopment 2

Health SystemDevelopment 2

Health SystemDevelopment 2

Health SystemDevelopment 2

Health SystemDevelopment 2

Health SystemDevelopment 2

Health SystemDevelopment 2

Health SystemDevelopment 2

Health SystemDevelopment 2

Health SystemDevelopment 2

Health SystemDevelopment 2

State EducationSector Project

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

Local Empowermentand EnvironmentManagement

Community-BasedPoverty Reduction,Community SocialDevelopment

Community-BasedPoverty Reduction,Community SocialDevelopment

Community -BasedPoverty Reduction,Community SocialDevelopment

Local Empowermentand EnvironmentManagement

Local Empowermentand EnvironmentManagement

Urban Water 2

Urban Water 1

Fadama 2,Fadama 3

Fadama 2,Fadama 3

Fadama 3

Fadama 2,Fadama 3

Fadama 2,Fadama 3

Fadama 3

Fadama 3

Fadama 2,Fadama 3

Lagos UrbanTransportationProject

LagosMetropolitanDevelopment andGovernance

Community-Based UrbanDevelopment

Community-Based UrbanDevelopment

Community-Based UrbanDevelopment

Lagos MetropolitanDevelopment andGovernance

(Table continues on next page)

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RL

D B

AN

K E

NG

AG

EM

EN

T A

T T

HE

ST

AT

E L

EV

EL

Plateau

Rivers

Sokoto

Taraba

Yobe

Zamfara

FCT

2

4

3

4

5

3

4

Health SystemDevelopment 2

Health SystemDevelopment 2,Malaria

Health SystemDevelopment 2

Health SystemDevelopment 2

Health SystemDevelopment 2

Health SystemDevelopment 2

Health SystemDevelopment 2

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

HIV/AIDS

Community-BasedPoverty Reduction,Community SocialDevelopment

Fadama 3

Fadama 3

Fadama 2,Fadama 3

Fadama 3

Fadama 3

Fadama 2,Fadama 3

Table F.3: Nigeria: Distribution of Projects by States (continued)

Community-Number of driven Transport, Urban

State projects Health Education HIV/AIDS development Water Agriculture power development Governance

A P P E N D I X F : D I S T R I B U T I O N O F P R O J E C T S B Y S TAT E S

9 3

Table F.4: The World Bank Fee-for-Service Activities at the Subnational Level in the RussianFederation

Region/Area Description

Development of Public-Private Partnership System

City of St. Petersburg Advising the government on establishing a regional public-private partnership unit (expansion of Pulkovo Airport,and building of the Western High Speed Diameter, Orlovsky Tunnel, and Nadzemny Express Projects), as well asmanaging the public-private partnership projects

City of Kazan Advising on development of a mid-term public-private partnership–based management strategy for the KazanAirport

Volgograd Oblast Advisory services to the government a public-private partnership unit

Education

Khanty-Mansi Autonomous A comprehensive assessment of the regional education system and provision of analytical services Okrug-Yugra tohelp upgrade the Okrug’s preschool education system

City of Kazan A diagnostic study of the higher education system to further design of a balanced education development strategyfor the city

City of Moscow Developing a strategy to improve the international status and to strengthen the research capacity of the HigherSchool of Economics

Tver Oblast Cooperation on designing a package of measures for vocational education system development

Health

Khanty-Mansi Autonomous Assistance in restructuring the health care delivery system and strengthening the institutional Okrug-Yugracapacity for medical education and clinical research

City of Kazan Designing measures to strengthen the healthcare system

Social policy/assistance

Republic of Tatarstan Monitoring and evaluation of living standards and poverty indicators

Tver Oblast Cooperation in improving targeted social assistance

Kalmyk Republic Advisory services to improve social assistance efficiency

Infrastructure development

City of Nizhnevartovsk Supporting the development of a Housing and Communal Services Strategy and Action Plan (2008–12)

Perm Krai Designing a regional infrastructure development program

Strengthening of regional administration capacity

Khanty-Mansi Autonomous Assistance on improving the government’s institutional structure and performance, including a horizontal function Okrug-Yugra review in executive authorities of the Okrug

Tomsk Oblast A study of administrative barriers to investment and advice on improvement of the investment climate Republic of Tatarstan A study of administrative barriers to investment and advice on investment climate improvement

Source: World Bank Russia Country Office, as of April 6, 2009.

9 5

Enacted in May 2000, the Fiscal ResponsibilityLaw (FRL) is at the core of efforts to strengthenfiscal institutions in Brazil. The main issues ad-dressed by the LRF are in six areas:

• Debt: The FRL contains strict provisions on in-debtedness and issuance of public debt by the central bank, prohibiting creditor debt- restructuring operations among the variouslevels of government. In accordance with Ar-ticle 30 of the law, a Senate resolution estab-lished limits of indebtedness for each level of government. When in breach of the debt ceilings, new financing and discretionary trans-fers to subnational governments are banned.

• Expenditures: The creation of permanentspending mandates without a correspondingincrease in permanent revenue or a reductionin other permanent spending commitmentsis prohibited, as are new spending commit-ments that cannot be executed before the endof the incumbent’s term in office.

• Personnel expenditures: FRL sets separateceilings for personnel spending, including pen-sions and payment of subcontractors. Spend-ing is limited at 50 percent of net currentrevenues at the federal level, and 60 percent forstates and municipalities. In case of noncom-pliance, the jurisdiction is not allowed to engagein new credit line operations, and subnationalgovernments will not be allowed to receivetransfers or credit guarantees from the federalgovernment.

• Transparency: Budget outturns and compli-ance with the FRL—including a statement ofcorrective measures if the relevant provisionsare breached—are reported on a regular basis.Municipalities and states are also required to re-port the fiscal outturns of the previous year tothe Ministry of Finance. The legislative branchof each level of government, aided by their re-spective Court of Accounts, monitors obser-vance with the fiscal targets and ceilings.

• Legal framework: The FRL introduced morestringent requirements on fiscal targets in thepreparation of the Budget Guidelines Law (Leide Dotações Orcamentárias—LDO), strength-ening its role in budget preparation and fiscalmanagement in general. The LRF also calls for a detailed assessment of the government’scontingent liabilities and strengthens the linkbetween the Annual Budget Law (Lei de Orça-mento Annual—LOA) and the LDO. A com-plementary Fiscal Crime Law is applied to alllevels of the public administration, with thepossibility of detention for public officials whofail to comply with the FRL.

• Golden rule: To prevent financing of currentspending by borrowing, the amount of newloans contracted is limited to the amount of thecapital expense. In practice, it means that anyloans contracted will only be used for expensesrelated to investments.

APPENDIX G: FISCAL RESPONSIBILITY LAW—BRAZIL

9 7

Brazil

Overview of Other Donor Agency ActivitiesAlong with the World Bank, the major external fi-nancing agencies operating in Brazil are the Inter-American Development Bank (IDB) and theAndean Development Corporation (CAF). TheIDB and the Development Corporation both workto contribute to the process of economic and so-cial development in Latin America and activelycarry out projects in Brazil. The Development Corporation has concentrated its efforts on: (i) supporting municipal governments; (ii) re-gional integration; (iii) socioeconomic develop-ment; (iv) infrastructure; and (v) the privatesector. At the subnational level, IDB works mainlywith municipal governments. Its operational strat-egy has rested on three major components, in-cluding: (i) promoting sustained, stable, andenvironmentally sustainable growth; (ii) reducingpoverty, promoting social inclusion, and en-hancing social and regional equity; and (iii) sup-porting institutional strengthening and promotingdemocracy and citizen participation.

Donor Coordination/CollaborationThe Bank program in Brazil is based on an infor-mal structure with IDB that determines whichagency will do what. There are:

• Areas where the two banks have worked to-gether effectively (for example, in financingthe Bolsa Familia program and, in the future,helping with restructuring state debts)

• Areas where each bank “leaves it to the other.”For example, the World Bank (IBRD) special-izes in rural development and the IDB intourism.

• Areas where demand is so large that both banksengage independently (in areas such as publicsector management and infrastructure).

The Bank also works closely with several bilateralagencies—for example, the European Union andGermany in conservation in the Amazon, and theUnited Kingdom on climate change and public sec-tor management.

India

Overview of Other Donor Agency ActivitiesThere were a large number of donor agencies inIndia, and the Bank had close collaboration withthem in most sectors, including energy (ADB,Japan Bank for International Cooperation [ JBIC],U.K. Department for International Development[DFID], U.S. Agency for International Develop-ment [USAID], Kreditanstalt für Wiederaufbau[KfW], Canadian International DevelopmentAgency [CIDA]), health and nutrition (USAID,World Health Organization [WHO], EuropeanCommission [EC], DFID, concerned UN agencies,Australian Agency for International Development[AusAid], International Labor Organization [ILO],and other institutions, including the Gates Foun-dation), and small and medium-size enterprise fi-nancing (DFID, KfW, German Agency for TechnicalCooperation [GTZ], and International FinanceCorporation [IFC]). However, in September 2003,the government of India announced new guide-lines for development cooperation with bilateralpartners. In keeping with the new guidelines, India will receive direct bilateral assistance onlyfrom Japan, the United Kingdom, Germany, theUnited States, the European Commission, and theRussian Federation. All other bilateral assistance

APPENDIX H: PARTNERSHIPS WITH OTHER DEVELOPMENT AGENCIES

would be routed either through multilateral or-ganizations or, for projects of economic and socialimportance, directly to universities, NGOs, or au-tonomous bodies registered under the ForeignContribution (Regulation) Act. With this shift, theBank has lost some valuable partners in India, andnow has fewer donor partners to work with. Be-cause of the changed donor landscape, particularfocus has been placed on coordination with thelargest external financing sources (ADB, EC, DFID,Japan, and Germany).

Donor Coordination/CollaborationA good example of exploiting synergies with part-ners is the World Bank’s work with DFID. At thesuggestion o f DFID, the Bank and DFID-India en-tered into a strategic partnership agreement inApril 2004. DFID has provided trust fund re-sources to the World Bank to work on commonpriorities. DFID and the Bank have worked to-gether on direct budgetary support and powersector reform in Andhra Pradesh and Orissa, andalso cofinanced (with other agencies) the federalgovernment’s centrally sponsored education pro-grams. World Bank and DFID staff worked par-ticularly closely in Bihar and Orissa, building ona shared vision of the development process andthe primacy of client ownership.

There are considerable overlaps in the areas of activity between the Bank and ADB in India. Bothinstitutions have a substantial and growing in-volvement in infrastructure and in energy, andboth are also engaged in adjustment lending tostates. To avoid overlap, ADB, the Bank, and the In-dian government completed a Coordinated Assis-tance Strategy for roads in June 2001, focusing onstate and national highways. The ADB and WorldBank have continued to exploit complementaritiesin several other sectors, including finance, power,and railways. ADB has also been proactive in lend-ing to lagging states, with commitments to fund thesix most poorly connected states.

Nigeria

Overview of Other Donor Agency ActivitiesAlong with the World Bank, DFID and USAIDhave taken the lead in state-level work in Nigeria.DFID, USAID, and the World Bank signed thePrinciples of Partnership agreements with the

lead states. DFID has supported lead state gov-ernments to develop a plan to build the capacityof local governments. USAID is implementing its economic growth and governance programin Cross River, Kano, and Kaduna, and is also in-creasingly focusing resources on Kano and Kadunain particular. Both of these agencies have alsoworked in the nonlead states: DFID has workedon girls’ education, immunization, malaria re-duction, and HIV/AIDS. USAID has worked withinits strategic framework on governance and democ-racy, growth, and human development.

Donor Coordination/CollaborationThe Bank-DFID partnership dominates the donorscene in Nigeria. Over the period of fiscal1998–2008, the Bank and DFID cofinanced twostate projects (Universal Basic Education, fiscal2003, and the State Education Project, fiscal 2007),both in the education sector. The World Bank hasa joint CPS (fiscal 2005) with DFID. Joint diag-nostics and analysis included Country EconomicMemorandum, the Education Public ExpenditureReview, and the Investment Climate Program,which assisted in designing DFID and World Bankinterventions to support growth and private sec-tor development at the state level. In addition toa main office in Abuja, DFID also has three regionaloffices (Lagos, Kano, and Enugu) that coordinateprograms in several of Nigeria’s 36 states. Thoughthe Bank does not have regional offices, it was ableto work in cooperation with DFID’s significantpresence on the ground in Kano (the relationshipwith Kaduna is also managed from this office)and more limited presence in Enugu (also cover-ing Cross River) and Lagos.

Other agencies, such as USAID, the UNDP, and theAfrican Development Bank (AfDB), have varyingdegrees of partnership, but most have limitedengagement. Nigeria’s main development partners(USAID, EC, African Development Bank, and theUN system) have been working closely and planto sign a joint 2009 CPS.

Russia

Overview of Other Donor Agency ActivitiesInternational donors have been actively involvedin Russia, but the scope of international donor as-sistance is becoming more limited and selective

9 8

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

as Russia’s economic performance improves.Russian itself is emerging as an internationaldonor and active member of multilateral organ-izations. Even so, there are a few external financing agencies operating in Russia; the Eu-ropean Bank for Reconstruction and Develop-ment (EBRD) is a prominent donor in this group.Since 2002, the EBRD has maintained annual in-vestment levels in Russia of over EUR 1 billion, 80percent of which has gone to the private sector.It has an active program focused on nonsovereignlending, including lending to Russia’s regions.The EBRD has been particularly active in the fi-nancial sector; energy; infrastructure; manufac-turing; and, through the Russia Small BusinessFund, the small and medium-size enterprise sec-tor. Like IFC, the EBRD has been introducingnew financial instruments in Russia, includingruble-denominated bond issues and loans in2005, and working increasingly with regional administrations.

Donor Coordination/CollaborationThe EBRD remains a vital working partner forthe World Bank Group, particularly for IFC. Todate, IFC and the EBRD have jointly supported

more than 20 projects in Russia. Most of theseprojects are in financial markets, general manu-facturing, and private equity funds. The WorldBank and the EBRD have collaborated on se-lected analytical work, such as work on the busi-ness climate. Examples of World Bank partnershipwith other development agencies include theprogram on public administration and budget re-form supported by DFID, CIDA, the Swedish In-ternational Development Agency [SIDA], and theEuropean Union. The Bank has collaboratedclosely with the Organization for Economic Co-operation and Development (OECD) on issues oftertiary education. The Bank and WHO jointlycoordinated a partnership for work on improvinggovernance in the Southern Federal Okrug, whichincluded the active participation of USAID, the Eu-ropean Union, and DFID. A multisector Finnishtrust fund has supported a diverse set of regionaldevelopment activities in the regions of the North-west. DFID has also supported the Bank’s povertywork in Russia. IFC’s Private Enterprise Partner-ship in Russia has been funded by the govern-ments of Austria, Canada, Denmark, Finland,Switzerland, and Saxony (of Germany), as well asby the Global Environment Facility.

APPENDIX H: PARTNERSHIPS WITH OTHER DEVELOPMENT AGENCIES

9 9

1 0 1

People Interviewed/Consulted

Brazil

Idilvan Alencar Executive Secretary, State Secretariat of Education, Ceará

Rodrigo Apgaua Secretariat of Education (SEE), Minas Gerais

Luiz Antonio Athayde Under Secretary, Head of Public-Private Partnership Unit, StateSecretariat for Economic Development, Minas Gerais

Andre Barrence Director of Superintendancy for Central Coordination, Secretariat ofPlanning and Management (SEPLAG)

Marcus Augusto Coordinator, State Secretariat of Finance, CearáVasconcelos Coelho

Carlos Eduardo Lampert Costa Deputy Secretary, Federal Ministry of Planning and Management, Secretariat of International Affairs

Edoardo Coutinho Deputy Secretary, National Treasury

Juliana Damasceno Secretariat of Planning and Management (SEPLAG)

Accacio Ferreira Coordinator of EXPORTMINAS, State Economic DevelopmentSecretariat (SEDE), Minas Gerais

Marcela Ferreira Projects Coordinator, State Economic Development Secretariat(SEDE), Minas Gerais

Jurandir Gurgel Gondim Filho Coordinator, State Secretariat of Finance, Ceará

Joao Filocre Secretariat of Education (SEE), Minas Gerais

Francisco Gaetani Deputy Executive Secretary, Federal Ministry of Planning, Budgetand Management Executive Secretariat

Marcos Costa Holanda Director General, Economic Research and Strategy Institute (IPECE),State Secretariat of Planning and Management, Ceará

Henri Kistler Adviser, Federal Ministry of Finance, SAIN

Monica Salles Lanna Legal Adviser, State Economic Development Secretariat, Minas Gerais

Leonardo Mauricio Deputy Secretary of Finance, State Secretariat of Finance,Colombini Lima Minas Gerais

Thais Amaral Lucena State Secretariat of Planning and Management, Ceará

Joao Marcos Maia Deputy Secretary, State Secretariat of Finance, Ceará

Tiago Moraes Institute for Governance Studies (IGS)

APPENDIX I: PEOPLE MET

Bernardo Moretzsohn Secretariat of Planning and Management (SEPLAG), Minas Gerais

Jorge Duarte de Oliveira Director, EXPORTMINAS, State Economic Development Secretariat(SEDE), Minas Gerais

Silvana Parente Secretary of Planning, State Secretariat of Planning and Management,Ceará

Cesar Augusto Pinheiro Secretary, State Secretariat of Hydro Resources, Ceará

Gilberto Resende Secretariat of Education (SEE), Minas Gerais

Fernanda Cimini Salles Assistant in International Projects and Operations, State EconomicDevelopment Secretariat (SEDE), Minas Gerais

Accacio F. Santos Jr. Superintendent of Foreign Trade Affairs, State Secretariat forEconomic Development, Minas Gerais

Aline Dieguez B. de Program Director, Federal Ministry of Planning, Budget andMeneses Silva Management Executive Secretariat

Frederico Amaral E Silva Public Policy and Management Specialist, Government of State ofMinas Gerais

Rafael Siqueira Secretariat of Planning and Management (SEPLAG)

Bernardo Tavares Deputy Secretary of Planning, Secretariat of Planning andManagement (SEPLAG)

Thiago Toscano Under Secretary of Planning, Secretariat of Planning andManagement (SEPLAG)

Alvaro Vereda Federal Ministry of Finance, SAIN

Renata Vilhena Secretary of Planning, State Secretariat of Planning and Management,Minas Gerais

India

K. C. Badu Team Member, Orissa Economic Recovery Credit

M. Brahmaiah Resource Group Director, Financial Management, Center for GoodGovernance, Andhra Pradesh

Ch. Channareddy BE Director (Transmission), Andhra Pradesh Transco

Soumya Chattopadhyay Under Secretary to the Government of India, Department ofEconomic Affairs, Ministry of Finance

K. Damayanthi Secretary, Andhra Pradesh Social Welfare Residential EducationalInstitutions Society

S. Galeb Professor, Center for Economic and Social Studies (CESS), AndhraPradesh

Sri Azhar Hussain Deputy Executive Engineer, Roads Department, Andhra Pradesh

K. Kamayanthi Secretary, Andhra Pradesh Social Welfare Residential EducationalInstitutions Society

A. Srinivas Kumar Deputy Executive Director (Finance & Projects), Centre for GoodGovernance, Andhra Pradesh

T. Vijay Kumar Chief Executive Officer, Society for Elimination of Rural Poverty,Andhra Pradesh

1 0 2

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

Vasudha Mishra Secretary, Finance (PMU) Department Government of AndhraPradesh

G.K. Mitra Faculty, Center for Economic and Social Studies (CESS), AndhraPradesh

B.C. Mohapatra Additional Secretary, Finance Dept., Government of Orissa

Partha Mukhapadhay Centre for Policy Research, New Delhi

C.S. Murthy Professor, Center for Economic and Social Studies (CESS), AndhraPradesh

Er. Jayamangal Nayak Chief Engineer, World Bank Projects, Orissa State Roads Project(fiscal 09), Project Management Unit Works Department, Govt. ofOrissa

K. Nijayanand Joint Managing Director, Transmission Corporation of AndhraPradesh Ltd.

Manoj Panda Director, Center for Economic and Social Studies (CESS), AndhraPradesh

Naresh Penumaka Additional Secretary, Finance Department, Government of AndhraPradesh

R. Radhakrisna Professor, Center for Economic and Social Studies (CESS), AndhraPradesh

M.S. Srenivasa Rao Joint Director, Medical, Health, Andhra Pradesh

S. Bhale Rao Principal Secretary—Public Enterprise Department, Andhra Pradesh

P. Padmanabhe Rao Register, Center for Economic and Social Studies (CESS), AndhraPradesh

I.Y.R. Krishna Rao Principal Secretary to Government, Finance Department, AndhraPradesh

Sri M. Venkateroara Ras Roads Department, Andhra Pradesh

Satyapriya Rath O.S.D., Finance Dept, Government of Orissa

C. Ravi Faculty and Joint Director, Center for Economic and Social Studies(CESS), Andhra Pradesh

G.B. Redd Director Watershed Mission and Ex-Officio Special Secretary toGovt., Government of Orissa

P. Prudvikas Reddy Faculty, Center for Economic and Social Studies (CESS), AndhraPradesh

G. B. Reddy Director, Watershed Mission & Ex-Officio Special Secretary toGovernment, Orissa

I. Rama Chandra Reddy Deputy General Manager, State Bank of India, Andhra Pradesh

M. Gopinath Reddy Professor, Center for Economic and Social Studies (CESS), AndhraPradesh

R. Venkat Reddy M Venkatarangaiya Foundation, Andhra Pradesh

Sri M.K. Rehman Engineer in Chief, Irrigation Department, Andhra Pradesh

Alok Sheel Joint Secretary, Department of Economic Affairs, Ministry of Finance,Andhra Pradesh

APPENDIX I : PEOPLE MET

1 0 3

Dipak Kumar Singh Director, Department of Economic Affairs, Ministry of Finance

R.V. Singh Special Secretary to Government, P&C Department, Orissa

Prasann Thatte Program Manager, Centre for Good Governance, Andhra Pradesh

K. Vijayanand Joint Managing Director, Transmission Corporation of AndhraPradesh Ltd.

Nigeria

Ben Akabueze Commissioner for Economic Planning and Budget, Lagos State

John Bezard Commissioner for Economic Planning and Budget, Kaduna State

Olaoye Abdulkareem Deputy Director, Federal Ministry of Finance

Abiodun Alao Director, Federal Ministry of Finance

Bayamin Bagaiya DAF, Ministry of Planning and Budget, Kaduna State

Peter K. Bakam DPRS, Ministry of Planning and Budget, Kaduna State

Shehu Moh’d Bambale DIA, Ministry of Finance, Kaduna State

Dawuda Danbaki Director, Treasury Operation, Ministry of Finance, Kaduna State

S. Eloho Assistant Director, National Planning Commission

Bulus D. Emishe Permanent Secretary, Ministry of Finance, Kaduna State

Funso Esan Deputy Director, National Planning Commission

Yusuf Moh’d Hayatuddeen PFMU, Ministry of Finance, Kaduna State

Nuruddeen Ibrahim Director, Budget, Ministry of Planning and Budget, Kaduna State

Balarabe Shehu Kudan D/MOFI, Ministry of Finance, Kaduna State

Tunde Lawal Deputy Director, National Planning Commission

Sylvester O. Monye Secretary to the Council

Esther J. Myahwegi Project Coordinator, SESP, Ministry of Education, Kaduna State

Ayodele Omotosho Director, National Planning Commission

Stephen Oronsaye Permanent Secretary, Federal Ministry of Finance

Zahari Aminu Salihu Accountant-General, Ministry of Finance, Kaduna State

Danladi D. Sanda Permanent Secretary, Ministry of Planning and Budget, Kaduna State

Daniel K. Sankey DPME, Ministry of Planning and Budget, Kaduna State

Abbas Yahaya Sanusi Director, Final Accounts, Ministry of Finance, Kaduna State

D.B. Sule Assistant Director, Federal Ministry of Finance

Joel Usman M&E Officer, SESP, Ministry of Education, Kaduna State

Shamsuddeen Usman Minister, National Planning Commission

Sani Zorro SA (Communications), National Planning Commission

Russia

Eduard Batanov Chairman, St. Petersburg Finance Committee

Murat Gadelshin Adviser to the Prime Minister, Tatarstan Republic (former Vice-Mayor of Kazan)

1 0 4

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

Vladimir Gritskikh Director General, Directorate of Extra Budgetary Programs forMunicipal Development, Municipality of Kazan, Tatarstan Republic

Leonid Limonov Director General, Leontief Center

Nina Oding Head, Research Department, Leontief Center

Vladislav Onishchenko Deputy Director, Foundation for Enterprise Restructuring andFinancial Institutions Development

Alexander Puzanov Director General, The Institute for Urban Economics

Larisa Yeroshkina Acting Director, Intergovernmental Relations Department, FederalMinistry of Finance

World Bank

Abuja

Onno Ruhl Country Director, Nigeria

Bayo Awosemusi Lead Procurement Specialist, AFTPC

Steven R. Dimitriyev Sr. Private Sector Development Specialist, AFTFP

Simeon K. Ehui Sector Leader, AFTAR

Foluso Okunmadewa Lead Social Protection Specialist, AFTH3

Volker Treichel Lead Economist, AFTP3

Brasilia

John Briscoe Country Director, Brazil (ret.)

Alexandre Abrantes Manager, Portfolio & Operations

Antonio Rocha Magalhaes Former Bank staff

Madalena do Santos Consultant, World Bank (former World Bank staff)

Jennifer Sara Sector Leader, Infrastructure and Urban

Deborah Wetzel Lead Economist and Sector Leader

Dhaka

Vinaya Swaroop Adviser, MDW

New Delhi

Rachid Benmessaoud Operations Adviser, SACIN

Roger Grawe Consultant, SACIN

Mandakini Kaul Country Officer, SACIN

Rajna Khanna Senior Economist, SASGP

Gerard M. La Forgia Lead Health Economist, SASHD

Vikram Menon Senior Public Sector Specialist, SASGP

Giovanna Prennushi Economic Adviser, SASEP

V.J. Ravishankar Lead Economist, SASGP

APPENDIX I : PEOPLE MET

1 0 5

Moscow

Klaus Roland Country Director, Russia

Andrei Darusenkov Former Bank staff

Lev Freinkman Lead Economist

Andrei Markov Sr. Human Development Specialist, ECSHD

Tatyana Shadrunova Urban Specialist, ECSSD

Samir Suleymanov Senior Operations Officer, ECSSD

Stepan Titov Senior Economist, ESCPE

Washington, DC

Mauricio Carrizosa Adviser, IEGCR

Shahrokh Fardoust Senior Adviser, IEGDG

Roy Gilbert Lead Evaluation Officer, IEGSE

Mohinder Gulati Country Sector Coordinator, ECSSD

Poonam Gupta Country Program Coordinator, AFCNG

Nalini Kumar Senior Evaluation Officer, IEGSE

Larisa Leshchenko Senior Country Officer, AFCZA

Jorge Munoz Lead Rural Development Specialist, LCSAR

Tawhid Nawaz Operations Adviser, HDNOP

Marsha Olive Country Program Coordinator, ECCU1

Chris Parel Consultant, LCSPS

Jose Guillerme Reis Lead Private Sector Development Specialist, LCSPF

Mark Sundberg Manager, IEGCG

Vinod Thomas Director General, IEGDG

Fahrettin Yagci Consultant, AFTPM

Donors

Julian Barr Director, ITAD (DFID contractor)

Shamit Chakravarti Programs Officer, ADB, New Delhi

Emma Donnelly Deputy Head, DFID Nigeria

Tetsu Ito Social Economist (Financial Sector), ADB, New Delhi

Jaime Mano, Jr. Sector Specialist, IDB, Brasilia

Susanna Moorehead Former Director, DFID-India

Shigehiko Muramoto Head, Project Administration Unit, ADB, New Delhi

Sujatha Viswanathan Social Economist, ADB, New Delhi

Joseph Umoabasi Regional Coordinator, South-West Nigeria, DFID

1 0 6

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

1 0 7

Chapter 11. In some countries, federal governments are called

“central” or “national.” This study uses the term “fed-

eral government” for both.

2. The largest subnational units in three of the four

countries included in this review (Brazil, India, and

Nigeria) are called “states.” In Russia, the “subjects of

federation,” as they are known, can include republics,

okrugs, oblasts, and others. The more common term

used to describe all of them is “region.” This study

uses both terms, “state” and “region,” to describe the

subnational units in Russia.

3. The evaluation commissioned background ma-

terial for each country, prepared by Joao Oliveira (Brazil),

Tapas Sen (India), Olufemi Taiwo (Nigeria), and Galina

Kurlyandskaya (Russia). The report draws extensively

on this material.

Chapter 21. During most of the period reviewed, foreign ex-

change risks appeared negligible.

2. Detailed information on state-level lending for

each country can be found in Appendix F.

3. Over 1,000 municipalities were created after 1988.

4. The main reasons were poor management of

public resources by state (and local) governments,

lack of fiscal discipline, and no clear division of re-

sponsibilities among different government levels, often

leading to overlap in spending across different levels

of government.

5. State debt in bonds, as percentage of GDP, more

than doubled between 1990 and 1996.

6. According to many sources, the Real Plan had no

less significant impact on the Brazilian political econ-

omy than the Constitution of 1988. While the consti-

tution simply codified the power of subnational forces,

the reforms of 1993–95 dramatically reconfigured fis-

cal power. The Real Plan succeeded first and foremost

in taming inflation, which had numerous collateral ef-

fects. It made spending at all levels of government

more transparent, which prevented governors from

engaging in unsustainable spending patterns (Dillinger

and Webb 2001).

7. The Bank proposed a three-pronged strategy of

state lending: investment loans in social sectors and in-

frastructure in creditworthy states; reform loans in

states where fiscal and sector policy reforms were being

implemented; and, for states with low creditworthiness,

the Bank would lend through federal loans (requiring

federally funded counterpart financing).

8. These loans were Minas Gerais State Privatization

(fiscal 1998, later dropped because of the state gov-

ernment’s moratorium on state debt); Rio de Janeiro

State Reform Privatization (fiscal 1998); Rio de Grande

do Sul State Reform Project (fiscal 1997); and Mato

Grosso State Privatization Project (fiscal 1997).

9. See Chapter 3 for details.

10. State selectivity was based on a more systematic

approach using such criteria as the total number of poor,

average income levels, fiscal performance, social per-

formance and innovation, structural reform perfor -

mance, policy continuity, and implementation capacity.

Based on these benchmarks, Bank lending for all north-

eastern states was expected to be approximately 55 per-

cent of total Bank lending, assistance for the north

and center-west was expected to be about 10 percent

of total Bank assistance, and assistance for selected

states of the southeast and south with about 15 percent

and 10 percent of Bank assistance, respectively. Re-

maining Bank assistance was to be allocated case-by-case

to support innovations or special opportunities.

11. Foreign reserves had fallen from $74 billion in

April 1998 to $30 billion in January 1999.

12. These loans included Programmatic Financial

Sector Adjustment Loan I and II (fiscal 2001 and fiscal

2002); Programmatic Fiscal Reform I and II (fiscal 2001

ENDNOTES

and fiscal 2003); and Programmatic Human Develop-

ment Sector Reform Loan I (fiscal 2003).

13. Projects would include a component to address

cross-cutting public sector management issues, such as

capacity building for better policy analysis and expen-

diture review, and focused support for specific policy

reforms: Maranhao Rural Poverty Reduction (fiscal

2004); Pernambuco Education Quality Improvement

Project (fiscal 2005); Bahia Rural Poverty (fiscal 2006);

and others.

14. The state and municipal projects would even-

tually have to be approved by Brazil’s inter-ministerial

commission (COFIEX).

15. One often-cited example is the Minas Gerais

Rural Poverty Reduction Project (fiscal 2006). Although

there are significant numbers of poor living in its north-

ern region, Minas Gerais is one of Brazil’s wealthiest and

best-performing states. The Bank believed that suc-

cessful engagement in Minas Gerais would produce a

demonstration effect throughout Brazil.

16. See Chapter 3 for details on Brazil’s multisector

SWAp.

17. Because of a change in the Bank’s policy in

1998, DPLs could be used as a lending instrument in

subnational governments.

18. A subnational DPL supporting an ambitious pub-

lic sector modernization program was implemented in

Minas Gerais—a well-performing high-income state. A

subnational SWAp supporting a comprehensive sectoral

program was implemented in Ceará—a relatively poor

but well-managed state.

19. Almost half of the projects were at the state

level.

20. The Brazilian experience showed three things.

First, there is little chance for new lending in the first

year of the four-year term, because it usually takes

months to formulate a program. Second, in the next

two-to-three years, there is high demand for fast re-

sponse from the Bank, to show results before the

term expires. Third, demand declines in the last year,

because the law prohibits the state government from

borrowing in the last nine months of the term. For the

Bank, this means that commitments are going to be

uneven, with more lending in the first and second

years of the Country Partnership Strategy (corre-

sponding to the second and third years of terms of state

administrations), and less in the third and fourth years.

In addition, the long (on average, 30 months) lag be-

tween approval of the project concept by the federal

government and signing of the loan needs to be short-

ened drastically.

21. Several states were created after 1950.

22. Selection of state projects was done on project

and sector grounds, without much concern for the

overall policy of the state. Sometimes there was polit-

ical pressure to spread Bank operations over as many

states as possible, without a strategic rationale at the

level of individual states.

23. Bank engagement was not universally welcomed

because the political costs of such reforms were feared

to be large (reduction of subsidies on irrigation water,

power, and the like, reducing the wage bill and public

enterprise reforms), and there were genuine concerns

about their impact on the poor (user charges for health

services). There was resistance to reforms from the left-

ist states almost as a matter of principle as well, because

the Bank-supported reforms involved privatization.

24. The central government sought the Bank’s help

in disciplining the states, specifically in inducing them

to accept and abide by a hard budget constraint, in

exchange for quick disbursement and relatively cheap

financing.

25. Formally, this was an investment project, but it

had the kind of macro-conditionality normally associ-

ated with a policy-based loan.

26. Adjustment lending never took off to the extent

envisaged in the 2001 CAS, but there was a steady flow

of about one adjustment loan a year, or around $150

million a year.

27. The DPL for Tamil Nadu was later dropped.

28. CAS objectives had been achieved in the re-

forming focus states.

29. Two to Orissa (fiscal 2005, 2007), one to Andhra

Pradesh (fiscal 2007), one to Bihar (fiscal 2007), and

one to Himachal Pradesh (fiscal 2008), for a total of

$1.1 billion.

30. This was driven largely by a decline in the Uttar

Pradesh portfolio, reflecting the hiatus in dialogue

until 2007. Among the four states, the Bank’s portfo-

lio increased only in Bihar. Outstanding loans to Orissa

and Jharkhand remained roughly the same.

31. Centrally sponsored schemes are programs de-

signed and financed by the central government but im-

plemented by state and local governments. Bank support

has taken various forms: support at the national level

(for example, the Sawa Shiksha Abhiyan Education for

All scheme); support to individual states participating

in a national scheme (for example, on rural roads); and

1 0 8

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

support to states in parallel to the national scheme (for

example, on rural water supply and sanitation).

32. Country strategy documentation for 2000 and

2001 (World Bank Group 2000, 2001, 2004b).

33. For example, three of the Bank’s projects—the

HIV/AIDS Program Development Project, the Second

Health System Development Project, and the Partner-

ship for Polio Eradication Project—covered all 36 states

of the federation. Several other projects, such as the Uni-

versal Basic Education Project, covered more than 10

states. Where it was obvious that the Bank could not

cover many states, consideration was given to the achieve-

ment of a balance among the six geopolitical zones.

34. The Bank helped to produce the Lagos State Eco-

nomic Development Strategy as well as fiduciary work

on procurement and financial management in Lagos.

35. The fiscal 2005 Country Partnership Strategy

was a joint strategy document with DFID.

36. The 2004 Country Partnership Strategy was a joint

CAS with DFID, which signaled close coordination of

the DFID and Bank programs. DFID was particularly

concerned that the lead states approach might divert

donor interventions away from the poorest parts of the

country. (IEG forthcoming.)

37. During IEG mission interviews, some Nigerian

counterparts suggested keeping the principle of the lead

state approach to enforce competition, but packaging

it in a modified way to avoid the controversy associated

with the lead state title. Among the ideas being con-

sidered by the Bank is the possibility of dropping the

lead states approach for investment lending, but using

DPLs as a way to support states that pass Laws of Fis-

cal Responsibility and show evidence of commitment

to higher standards of public sector management and

improved service delivery.

38. Those are 21 republics (native territories), 46

oblasts, 9 krais, 4 autonomous okrugs, 1 autonom-

ous oblast, and the 2 federal cities of Moscow and

St. Peters burg.

39. The problem of unfunded mandates was not fully

resolved until 2005, the year of expenditure assign-

ment reform.

40. Federal okrugs are best described as decon-

centrated federal government units that are supposed

to provide some oversight and control over subjects of

the federation. Their actual legal status remains elusive.

41. This is not precisely representative, as most of

the highest-income regions in Russia are the sparsely

populated northern territories rich in natural resources.

42. Only the St. Petersburg Rehabilitation Project (fis-

cal 1997) was approved during this period. The other

three dropped infrastructure projects were Siberia and

Far East Highways Rehabilitation (planned for fiscal

1998), Moscow Urban Transport (planned for fiscal

1998), and Krasnodar Power (planned for fiscal 1998).

43. The Regional Fiscal Federalism Project (fiscal

2000) and Fiscal Federal and Regional Fiscal Reform

Project fiscal (2002) are discussed in more detail in

Chapter 3.

44. Regions that met the Bank’s criteria were fairly

diverse in terms of geographic location and income. For

example, three out of six regions selected for one of

them were relatively rich regions, while the others

were well below the Russian average per capita budget

revenue level.

45. The term “subnational” instead of “regional”

was specifically introduced to underline the possibil-

ity of Bank involvement not only with the subjects of

federation (regions), but also with other subnational lev-

els of government, such as municipalities.

46. Analytical and advisory activities, IBRD loans in

support of federal programs, World Bank Institute ca-

pacity building activities, carbon financing, and grants.

47. Fourteen fee-for-service agreements have been

signed, one has been completed.

48. The World Bank Group (IFC and IBRD) has

committed $85 million in three subnational projects:

two in the Chuvash Republic for improvements in rural

road networks and water utility infrastructure and a local

currency loan to the Municipality of Petropavlovsk-

Kamchatsky to finance rehabilitation of about 23 per-

cent of its road network.

49. For example, in Brazil the stock of foreign re-

serves grew from $37 billion in 2002 to $205 billion in

2008.

Chapter 31. The topic of fiscal decentralization is part of the

broad area of fiscal federalism, but is not treated here.

In practice the Bank has not systematically advocated

fiscal decentralization, but it has supported fiscal de-

centralization when federal governments have deter-

mined that this is the direction in which they want to

proceed. Among the four countries, Brazil has moved

most clearly to decentralize fiscal decision making to

the state level during the period under review; the sit-

uation in Nigeria and Russia has been somewhat am-

biguous; and in India, arguably the growth of Centrally

ENDNOTES

1 0 9

Sponsored Schemes moves in the direction of greater

centralization.

2. The relationship of the state governments to local

governments is an important issue in federations. In

most cases there are mandatory requirements for shar-

ing revenues of the allocated transfers from the center

to the states. In Brazil the municipalities have a direct

relationship with the central government, and transfers

to them bypass the state government. This is an im-

portant subtopic that merits a separate examination.

3. Appendix B compares the fiscal framework in

each of these areas among the four countries studied.

4. Nigeria is a special case here. About a third of all

transfers go to the four oil-producing states, reflecting

the oil derivation payments. Fifty-four percent of trans-

fers are distributed equally across states, which obvi-

ously works to the disadvantage of the more populous

states, and a small share—2.5 percent—is distributed

according to the revenue-generation efforts of the

states, which tends to be regressive. The consequence

is that per capita income plays little role in the even-

tual distribution.

5. This has caused some problems for the Bank,

which normally requires a sovereign guarantee. In re-

cent years the Bank has developed a program with

IFC for a special Subnational Facility to lend directly to

states or municipalities. Two Russian entities, the Chu-

vash Republic (Rural Roads Project, $50 million) and the

Municipality of Petropavlovsk-K ($28 million) have thus

far received two loans from this Facility.

6. State deficits in India rose from a total of 2.28 per-

cent of GDP in 1993/94 to 4.17 percent in 1998/99,

while in Brazil the state primary deficit rose from 0.63

percent of GDP in 1995 to 2.12 percent in 1998.

7. In Brazil this lending was provided on IBRD

terms, which meant substantially lower interest rates

than would be applied to domestic borrowing. In India,

loans were provided on IDA terms, but at that point the

Indian government treated all external and internal

loans equally and passed them on to the states at the

domestic interest rate of 9.5 percent, with the federal

government taking the foreign exchange risk. In 2004

a new policy was adopted of passing on external loans

on a “back-to-back” basis—that is, at the actual inter-

est rate, but with the state government taking the for-

eign exchange risk of the loan.

8. Proposed project activities included (i) diagnos-

tic reviews and development of reform plans in budg-

eting and fiscal management; (ii) financial planning,

treasury, and cash management; (iii) budgetary ac-

counting, reporting, and audit; (iv) expenditure and

public sector restructuring; (v) debt management sys-

tems; (vi) regional budget procurement system; (vii)

regional fiscal management guidelines, best practice

standards, and regional and local public finance man-

ual; (viii) computer equipment and design of software

programs; and (ix) training of local staff needed for a

successful installation and subsequent application of in-

tegrated financial management systems in the selected

regions. In addition, the project was to assist partici-

pating regions with the design of expenditure reform

plans by financing a number of Public Expenditure Re-

views, which would primarily focus on the sectors that

had been the largest recipients of subsidies from con-

solidated regional budgets, such as housing and utili-

ties, agriculture, public transportation, education, and

health. This long list of components has resulted in very

slow implementation: separate terms of reference are

required for each component and the procurement

arrangements must be made for numerous small con-

sultant contracts.

9. The participating regions were: Vologda Oblast,

Samara Oblast, Belgorod Oblast, Chelyabinsk Oblast,

Khabarovsky Krai, and the Republic of Chuvashia. A sev-

enth region, St. Petersburg City, was subsequently

added to the FFRFRP’s first cohort of competitors, but

was not eligible for technical assistance under the

RFTAP.

10. However, in some specific areas (such as food

subsidy, pricing agricultural supply of power in Andhra

Pradesh) political economy factors proved to be too

strong to overcome.

11. Most high-level state officials interviewed by

IEG in the four countries welcomed the idea of brief,

separate, state-specific assistance strategies.

Chapter 41. The state of Ceará has confronted serious poverty

and development challenges, including tough climatic

conditions, frequent droughts, low levels of educa-

tion, high infant mortality, and scarce social and phys-

ical infrastructure and basic services. At the same time,

in the past 30 years, Ceará has been one of the better

managed and more progressive states in Brazil, with a

long and successful history of cooperation with the

Bank.

1 1 0

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

2. Minas Gerais is considered a microcosm of Brazil.

The per capita income is close to Brazil’s national av-

erage and personal and regional income disparities re-

flect those of the country. It is also one of Brazil’s largest

and wealthiest states, though with significant poverty

pockets in the north. It has substantial managerial ca-

pacity within the state government and is often com-

pared favorably with the federal government in this

regard. After the fiscal and financial disarray of the late

1990s, the new state government (since 2003) showed

a strong commitment to reaching fiscal sustainability,

public sector reforms, poverty reduction, and creating

an enabling environment for private sector develop-

ment. The Bank now has a sizeable program in the

state, including a Multisector SWAp, and the state offi-

cials have been very professional and skillful in devel-

oping the results indicators and managing the program

in general. However, it is difficult to point to obvious

value added derived from the Multisector SWAp. Per-

haps the part of the program that is most appreciated

by the local authorities is the Bank-financed technical

assistance, which provides flexible resources to indi-

vidual ministries and agencies to use to deepen and fine-

tune their programs.

3. St. Petersburg has the status of a “Subject of the

Federation”—equal to the status of a “state” in other

countries included in this review. The St. Petersburg

project was a hybrid: a combination of a regional DPL

(city component) and a standard investment loan (fed-

eral component). The rationale was not clear, because

the two components had very little in common. We are

not discussing here the investment, or so-called “fed-

eral” component of the project in St. Petersburg, aimed

at rehabilitation of city’s cultural assets.

4. Kazan is the capital of the Republic of Tatarstan.

At the time of the project was prepared, Kazan did not

have the status of a municipality, which was granted later

in the life of the project.

5. Tatarstan is a region of special significance for the

federal center. It is one of the largest and most power-

ful national republics, and a stronghold of Islam in Rus-

sia. In the 1990s Tatarstan enjoyed a high degree of

autonomy, including fiscal autonomy (with almost all

taxes retained in the republic). To ensure the smooth

return of Tatarstan into the system of intergovernmental

fiscal relations, the federal center introduced an ambi-

tious program of economic development of Tatarstan.

The Bank effectively became a part of that program.

6. Federal and regional authorities were eager to use

the loan financing before the celebration of the 1000th

anniversary of the city of Kazan.

7. IEG rated the outcomes of the project satisfactory.

8. The 2002–06 assessment of Bank AAA in India

rated it satisfactory overall, but moderately unsatisfac-

tory with respect to coherence and internal integration.

It also noted the wide variation in quality and the

supply-driven nature of the program, with little client

participation and client-level dissemination, which

made follow-up activities rather uncertain. It also rec-

ommended greater usage of available local research ca-

pacity as well as capacity-building activities in this area.

9. The Bank has a competitive edge over potential

private sector competitors in Russia: the 2005 Federal

Law on Public and Municipal Procurement does not

apply to the World Bank or to a number of other in-

ternational institutions, making Bank’s technical as-

sistance more attractive to the client.

10. See Appendix H for a more detailed account of

partnership with other donor agencies.

11. The joint strategic approach in Bihar is a relatively

recent development and is not covered by this review.

12. In June 2001, ADB and the Bank completed a Co-

ordinated Assistance Strategy for roads, focusing on

state and national highways. The Bank also coordi-

nated in other sectors, including inland and coastal

waterways.

13. Lagos is a megacity faced with the challenges of

sprawling urban growth and infrastructural decay. It is

also the commercial and industrial capital of Nigeria.

Slum areas account for about 70 percent of the state’s

population, with population growing at 4.8 percent

per annum, and density of 260 people per hectare.

Slum areas are generally under-serviced and have lim-

ited access to basic social services, including roads and

water. Flooding is a major phenomenon, which has a

strong association with poor solid waste management.

The objective of the LMDGP was to increase sustain-

able access to basic services through investments in crit-

ical urban infrastructure. This project is not progressing

satisfactorily due largely to management and procure-

ment challenges.

Chapter 51. Although the Institute of Economy in Transition,

Institute for Urban Economics, and Center for Fiscal Pol-

icy are physically located in Moscow, they are closely

ENDNOTES

1 1 1

involved in regional development issues in Russia.

Leontief Center is based in St. Petersburg.

Appendix A1. At the state level, only two projects closed with

an unsatisfactory rating. One was the Minas Gerais

State Privatization Project, which was cancelled 18

months after Board approval (and after three years of

project preparation) because the loan was never signed

with the counterparts. At this time, the governor of

Minas Gerais declared a moratorium of the state debt

to the federal government. As a consequence, the Bank

suspended the right of the state to make withdrawals

from the existing loan accounts and stopped preparing

new operations. The other unsatisfactory project tar-

geted the education sector (in Bahia, a lagging state).

2. There were only two other projects in the energy

sector that closed during this period with a satisfactory

rating, one at the federal level (power grid system de-

velopment) and one at the state level (Andhra Pradesh

Power APL).

3. The St. Petersburg Loan (SPDP) discussed in this

review, is still formally active, because its “federal com-

ponent” is still being implemented.

Appendix C1. In 2004, in response to long-standing requests

from states, the Indian government decided to change

the terms on which Bank and IDA financing is on-lent

to them. Instead of providing these funds to states on

uniform terms (70 percent grant, 30 percent loan at a

benchmarked interest rate for most states), funds are

now passed through on the same terms on which

they are received from the Bank and IDA—in rupees,

but including the foreign exchange risk. This arrange-

ment, known as the back-to-back lending system, has

raised some new issues: it transfers the management

of foreign exchange fluctuations to the states, and it

increases the complexity of loan administration and of

managing states’ access to IDA. Initially, the new sys-

tem did not diminish the states’ interest in borrowing

from the Bank. The present Global Financial Crisis,

however, raised concern on how the state would be

able to finance the additional cost of borrowing due

to the exchange rate depreciations India has been

experiencing.

1 1 2

WORLD BANK ENGAGEMENT AT THE STATE LEVEL

1 1 3

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gional Revenues and Incomes.” Comparative Eco-

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sia’s Transition to a New Federalism. WBI Learn-

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1 1 5

WORKING FOR A WORLD FREE OF POVERTY

The World Bank Group consists of five institutions—the International Bank for Reconstruction and Development (IBRD),the International Finance Corporation (IFC), the International Development Association (IDA), the MultilateralInvestment Guarantee Agency (MIGA), and the International Centre for the Settlement of Investment Disputes (ICSID).Its mission is to fight poverty for lasting results and to help people help themselves and their environment by providingresources, sharing knowledge, building capacity, and forging partnerships in the public and private sectors.

THE WORLD BANK GROUP

ENHANCING DEVELOPMENT EFFECTIVENESS THROUGH EXCELLENCE AND INDEPENDENCE IN EVALUATION

The Independent Evaluation Group (IEG) is an independent, three-part unit within the World Bank Group. IEG-World Bank is charged with evaluating the activities of the IBRD (The World Bank) and IDA, IEG-IFC focuses onassessment of IFC’s work toward private sector development, and IEG-MIGA evaluates the contributions of MIGA guar-antee projects and services. IEG reports directly to the Bank’s Board of Directors through the Director-General, Evaluation.

The goals of evaluation are to learn from experience, to provide an objective basis for assessing the results of the BankGroup’s work, and to provide accountability in the achievement of its objectives. It also improves Bank Group work by iden-tifying and disseminating the lessons learned from experience and by framing recommendations drawn from evaluationfindings.

THE INDEPENDENT EVALUATION GROUP

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